Fortinet (FTNT 0.23%) and CrowdStrike (CRWD 2.03%) represent two very different ways to invest in the growing cybersecurity sector. Fortinet provides next-gen firewalls and end-to-end security tools through a mix of on-site appliances, first-party software, and cloud-based services. CrowdStrike eschews on-site appliances and only provides its cybersecurity tools as services through its cloud-based Falcon platform.
Fortinet is the older cybersecurity company, but it differentiates itself from its competitors by developing its own proprietary chips. It claims that pairing its first-party chips with its own hardware and software enables it to tackle threats more efficiently than other companies that use off-the-shelf chips. Meanwhile, CrowdStrike is the newer challenger, and aims to eliminate the need for on-site appliances -- which are pricier, take up more space, and are more difficult to scale than cloud-based services.
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Both stocks have generated massive gains since their IPOs. But over the past 12 months, Fortinet's stock only rose 22% as CrowdStrike's stock soared 190%. Let's see why CrowdStrike outperformed Fortinet, and if it's still the better buy right now.
Fortinet faces a near-term slowdown
From 2017 to 2022, Fortinet's revenue grew at a compound annual growth rate (CAGR) of 24%, and its billings rose at a CAGR of 25%. But in 2023, its revenue and billings only increased 20% and 14%, respectively.
That slowdown was caused by three major challenges. First, many of its customers ramped up their hardware spending in 2022 in response to the supply chain constraints of 2021, but that temporary spending boost fizzled out in 2023. Second, the upgrade cycle for next-gen firewall products cooled off throughout the year. Lastly, the macro headwinds drove many companies to rein in their spending on big cybersecurity upgrades.
For 2024, Fortinet expects its revenue to rise just 8%-10% as its billings grow 0%-3%. On the bright side, it expects its top-line growth to stabilize again in the second half of 2024 and throughout 2025.
Analysts expect its revenue to rise 9% in 2024 and grow 14% to $6.6 billion in 2025. But during an analyst day presentation in May 2022, Fortinet boldly claimed it could generate $8 billion in annual revenue by 2025.
Fortinet also expects its adjusted EPS to grow just 1%-4% in 2024, which is below analysts' expectations for 5% growth, as its revenue growth slows down and it ramps up its spending on its first-party chips. Analysts expect its earnings to rise 14% in 2025 as its growth accelerates again, but its stock isn't cheap at 41 times forward earnings.
CrowdStrike is still firing on all cylinders
CrowdStrike's revenue grew at a jaw-dropping CAGR of 80% from fiscal 2018 to fiscal 2023 (which ended last January). That growth was driven by its rapid growth in large customers and rising adoption rates for its cloud-based modules.
CrowdStrike faced some of the same macro headwinds as Fortinet, but its revenue still rose 54% in fiscal 2023, and it expects 36% growth in fiscal 2024. Analysts expect its revenue to rise another 29% to $3.9 billion in fiscal 2025.
CrowdStrike's growth is cooling off, but its customers continue to adopt more of its modules. At the end of the third quarter of fiscal 2024, 42% of its customers had adopted at least six of its modules, versus 36% of its customers a year ago. That stickiness indicates it still has plenty of pricing power as it scales up its business.
CrowdStrike's gross margins expanded as economies of scale kicked in, and it turned profitable on a generally accepted accounting principles (GAAP) basis over the past three quarters as it reined in its stock-based compensation expenses. It expects its adjusted EPS to rise 92% in fiscal 2024, and analysts anticipate 27% growth in fiscal 2025.
Those growth rates are impressive, but its stock looks a bit pricey at 89 times forward earnings. The bulls might argue that its early-mover's advantage in the cloud-native space justifies that premium valuation, but the bears will point out that other formidable competitors -- including Palo Alto Networks and Microsoft -- are still creeping into the cloud-native space.
The better buy: CrowdStrike
Fortinet and CrowdStrike are both good long-term plays on the cybersecurity market, but Fortinet's near-term slowdown and high valuation could limit its gains this year. CrowdStrike's stock looks expensive, but its leading position in the cloud-native niche and rising profits could justify that higher valuation. So for now, I believe CrowdStrike will stay ahead of Fortinet -- but investors should probably wait for it to post its next earnings report on March 5 before initiating a new position.
