CrowdStrike (CRWD 2.03%) and Zscaler (ZS 1.28%) are both high-growth cybersecurity companies that provide all of their services as cloud-based offerings rather than on-site appliances. That streamlined approach is generally cheaper, doesn't take up any physical space in the office, and is easier to scale as an organization expands.
But in 2022, CrowdStrike's stock tumbled 49% as Zscaler's stock plunged 65%. Both stocks were crushed as their growth cooled off in a tougher macro environment. Rising rates exacerbated that pressure by popping their bubbly valuations.
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Yet 2023 has been a better year thus far. Since the beginning of the year, CrowdStrike's stock rallied more than 50% as Zscaler's stock advanced over 40%. Investors warmed up to both stocks again as the macro environment gradually stabilized. But should investors add either of these volatile cybersecurity stocks to their portfolios right now?
The similarities and differences between CrowdStrike and Zscaler
CrowdStrike and Zscaler might initially seem similar because they both shun on-site appliances in favor of cloud-native services. But they target different markets.
CrowdStrike's Falcon is a unified security platform that provides custom cloud-based modules for specific tasks like identity protection, threat intelligence, and endpoint security. Its locks in its users with a bundle of four free modules, and it uses a "land and expand" strategy to cross-sell additional modules to those customers.
Some 62% of CrowdStrike's customers had adopted more than five of those modules in its latest quarter, compared to 59% of its customers a year earlier. Its total number of subscription customers more than quadrupled from 5,431 at the end of fiscal 2020 to 23,019 at the end of fiscal 2023 (which ended in January 2023).
Zscaler provides a narrower niche of "zero-trust" services, which treat everyone -- including a company's CEO -- as a potential threat. As the company's name implies, it's usually easier to scale these zero-trust services across a cloud-based platform that can be seamlessly accessed by on-site, hybrid, and remote employees. Its number of customers more than doubled from 3,250 at the end of fiscal 2018 to over 6,700 at the end of fiscal 2022 (which ended last July).
Which company is growing faster?
CrowdStrike's revenue rose 82% in fiscal 2021, 66% in fiscal 2022, and 54% in fiscal 2023. But in fiscal 2024, it only expects 34%-36% growth as the macro headwinds force more companies to rein in their software spending.
During the company's latest conference call, CFO Burt Podbere bluntly admitted that he doesn't "see the macro improving now and for the rest of the year." But as CrowdStrike's revenue growth cools off, it's tightening its belt and focusing on its profits. That's why it still expects its adjusted EPS to rise 50%-57% in fiscal 2024.
Zscaler's revenue grew 56% in fiscal 2021 and 62% in fiscal 2022, and it anticipates 46% growth in fiscal 2023. However, analysts expect its revenue to only increase by 29% in fiscal 2024. During its latest conference call, CEO Jay Chaudhry admitted that the "elevated level of scrutiny" for software deals would likely persist through its current quarter.
Zscaler is also reining in its operating expenses to cope with its near-term slowdown. As a result, it expects its adjusted EPS to surge 136%-138% for the full year. Analysts expect its adjusted EPS to rise another 29% in fiscal 2024.
CrowdStrike and Zscaler are both profitable by non-GAAP (generally accepted accounting principles) measures that exclude their stock-based compensation expenses. However, CrowdStrike actually squeezed out a slim GAAP profit in its most recent quarter as Zscaler's GAAP numbers stayed deep in the red.
Which stock is a better value?
Neither of these stocks is a screaming bargain right now. CrowdStrike trades at 64 times forward earnings, while Zscaler has an even higher forward multiple of 77. For reference, Palo Alto Networks -- which is growing at a slower rate but generates stable GAAP profits -- trades at 49 times forward earnings.
I wouldn't rush to buy either of these stocks after their year-long rallies. But if I had to choose one, I'd stick with CrowdStrike, for three simple reasons: Its business is better diversified, it's approaching GAAP profitability, and its stock is cheaper.
