CrowdStrike (CRWD +1.01%) and Zscaler (ZS 2.34%) both recently posted strong quarterly reports that exceeded analysts' expectations on the top and bottom lines. Both cybersecurity stocks rallied after those earnings beats.
But over the past 12 months, CrowdStrike's stock has soared more than 120%, while Zscaler's shares rose by less 20%. Let's see why the bulls were more drawn to CrowdStrike -- and whether that trend will continue for the foreseeable future.
Image source: Getty Images.
The similarities and differences
CrowdStrike and Zscaler are both cloud-native cybersecurity specialists that don't install any on-site appliances. That lightweight approach is cheaper, easier to scale, and doesn't require any on-site maintenance services. Both companies also lock their clients into sticky subscription plans.
CrowdStrike's Falcon platform provides a broad range of endpoint security services that mainly counter external threats. Zscaler develops "zero-trust" services that treat everyone, including a company's top executives, as potential threats.
NASDAQ: CRWD
Key Data Points
CrowdStrike and Zscaler aren't direct competitors, but they have overlapping interests. CrowdStrike now offers its own zero-trust services, while Zscaler has been expanding its ecosystem with more security tools. Both companies have consistently kept their adjusted gross margin around 80%, so they still have plenty of pricing power in their respective markets.
The duo has also grown rapidly since their IPOs. CrowdStrike went public in 2019, and its revenue increased at a compound annual growth rate (CAGR) of 65% from fiscal 2019 to fiscal 2024 (which ended this January). Zscaler went public in 2018, and its revenue rose at a CAGR of 53% from fiscal 2018 to fiscal 2023 (which ended last July).
NASDAQ: ZS
Key Data Points
The pair faces similar challenges
Cybersecurity companies are resistant to macro headwinds, since most businesses won't shut down their digital defenses to save a few dollars. But it can still become tougher to lock new customers into bigger and longer-term contracts.
That's why CrowdStrike and Zscaler both grappled with slower growth over the past year. CrowdStrike expects its revenue to rise 28%-31% in fiscal 2025. Zscaler expects a 32% increase in revenue in fiscal 2024, while analysts anticipate a 23% boost in fiscal 2025. CrowdStrike's year-over-year revenue growth notably stabilized over the past two quarters, which implies it's passed its cyclical trough. Zscaler's revenue is still decelerating, and it expects its slowdown to deepen in its current quarter.
But CrowdStrike has a few advantages versus Zscaler
CrowdStrike and Zscaler might initially seem similar, but the profits tell a different story. CrowdStrike has stayed profitable on a generally accepted accounting principles (GAAP) basis for five consecutive quarters, but analysts don't expect Zscaler to generate an annual profit on the same basis until fiscal 2026.
On a non-GAAP basis, analysts expect CrowdStrike's EPS to rise 30% in fiscal 2025. They expect Zscaler's non-GAAP EPS to soar 64% in fiscal 2024 but only climb 13% in fiscal 2025 as it laps some cloud-related cost benefits and ramps up its investments again.
CrowdStrike also maintains higher free cash flow (FCF) margins than Zscaler. In their latest quarters, CrowdStrike's FCF margin rose 2 percentage points year over year to 35%, while Zscaler's FCF margin grew 4 percentage points to 22%.
CrowdStrike's insiders also seem more optimistic than Zscaler's. Over the past 12 months, CrowdStrike's insiders only sold about 28% more shares than they bought, while Zscaler's insiders sold nearly 10 times as many shares as they bought.
Neither of these stocks is a bargain
Both of these stocks still sport premium valuations. CrowdStrike trades at 87 times its forward adjusted EPS, while Zscaler has a lower forward multiple of 52. Zscaler might seem cheaper, but it deserves its lower valuation because its revenue growth is less impressive, it isn't profitable yet, and it has a narrower moat. CrowdStrike's valuations are getting a bit frothy after its yearlong rally, but I believe it will continue to outperform Zscaler as long as it keeps exceeding Wall Street's estimates.
