Tenable (TENB 0.29%) and Zscaler (ZS 1.41%) represent two very different ways to invest in the booming market for cybersecurity services. Tenable's Nessus platform proactively prevents cyberattacks by scanning networks for misconfigured software, weak passwords, and other security issues. Zscaler's cloud-based platform provides zero-trust services that treat everyone -- including a company's CEO -- as a potential threat to minimize the chances of a data breach.

Both cybersecurity companies have grown rapidly over the past few years. Tenable, which went public in 2018, increased its annual revenue at a compound annual growth rate (CAGR) of 26% from 2018 to 2022. Zscaler went public the same year, and its annual revenue rose at a CAGR of 55% between fiscal 2018 and 2022 (which ended last July).

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Tenable's stock hit an all-time high of $62.66 last April, but it now trades at about $37. Zscaler's shares soared to a record high of $368.78 in November 2021, but they're now only worth $92. Both stocks were crushed as rising interest rates drove investors toward more conservative investments. They also faced concerns about their slowing growth and losses on a generally accepted accounting principles (GAAP) basis.

Should investors take a chance on either of these out-of-favor cybersecurity stocks?

Tenable is bracing for a near-term slowdown

Tenable serves more than 40,000 customers worldwide, including 60% of the Fortune 500 and 40% of the Global 2000. In 2022, its revenue rose 26% to $683 million, its calculated billings increased 26% to $777 million, and its non-GAAP net income grew 14% to $44 million. However, its GAAP net loss nearly doubled to $92 million.

At the end of 2022, Tenable predicted its revenue would climb 17%-19% and its calculated billings would increase 18%-19%. But at the end of the first quarter of 2023, it reduced its full-year forecast to just 13%-15% revenue growth and 13%-14% calculated billings growth. It attributed that guidance cut to the persistent macro headwinds, which forced companies to scrutinize and postpone big software deals. The expansion of its ecosystem -- including its subscription-based cloud platform Tenable.io and unified risk-based exposure platform Tenable.ep -- couldn't offset that slowdown.

Tenable's adjusted gross margin declined from 82% in 2021 to 80% in 2022, and it slipped another 2 percentage points year over year to 79% in the first quarter of 2023. But it's reining in its spending as its growth cools off, and it now expects its full-year adjusted EPS to rise 50%-61%, compared to its prior outlook for 37%-47% growth. But at $37, Tenable still doesn't look like a screaming bargain at 63 times the midpoint of its adjusted EPS forecast and 6 times this year's sales.

Zscaler faces the same headwinds

Zscaler serves more than 6,700 customers, including 30% of the Global 2000. In fiscal 2022, its revenue rose 62% to $1.09 billion, its calculated billings grew 59% to $1.48 billion, and its non-GAAP net income increased 34% to $101 million. But on a GAAP basis, its net loss still widened from $262 million to $390 million.

For fiscal 2023, Zscaler expects its revenue to rise 42%-43% and for its calculated billings to increase 31%. It's still growing like a weed, but its growth is gradually decelerating as it faces many of the same near-term macro headwinds as Tenable and other cybersecurity companies. Zscaler's clients generally won't lower their existing digital defenses just to save a few dollars, but they'll still spend less money on its new features.

To counter that pressure, Zscaler has been allowing more of its customers to ramp into larger subscription commitments, which consist of lower first-year billings followed by higher second-year billings. In other words, it's sacrificing some of its near-term growth to lock in more long-term subscribers.

Zscaler's non-GAAP gross margin held steady year over year at 81% in fiscal 2022, and rose by a percentage point to 81% in the first half of 2023. It's also cutting costs as its growth cools off, and it expects its adjusted EPS to surge 120%-121% in 2023. But for fiscal 2024, analysts forecast its revenue and adjusted EPS to only rise 29% and 30%, respectively. Based on those projections, Zscaler still looks a bit pricey at 54 times forward earnings and 7 times next year' sales.

The winner: Zscaler

Tenable and Zscaler should both keep expanding over the long term, but Tenable's slower growth, shrinking gross margin, and higher price-to-earnings ratio make it less appealing than Zscaler. Zscaler could also remain out of favor as investors focus on its slowing growth and near-term challenges, but it will likely outperform Tenable this year.