Fortinet (FTNT -0.85%) and Zscaler (ZS -3.37%) represent two different ways to invest in the expanding cybersecurity market. Fortinet provides a wide range of endpoint security services for on-premises, cloud-based, and Internet of Things (IoT) devices. Zscaler is a smaller, faster-growing provider of cloud-native “zero trust” services that treat everyone, including a company’s top executives, as potential threats.

Over the past 12 months, Fortinet’s stock rose 26% as Zscaler’s stock dipped 1%. Let’s see why the former outperformed the latter by such a wide margin — and if it’s still the better buy.

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The key differences between Fortinet and Zscaler

Fortinet originally developed next-gen firewalls (NGFWs) that upgraded traditional firewalls with more advanced network-filtering tools. Those firewalls eventually became the foundation of its “Security Fabric,” which bundles together more than 50 on-premises and cloud-based services. It now serves over 775,000 customers across the world.

Fortinet is fundamentally similar to Palo Alto Networks (PANW -2.30%), which also developed NGFWs before rolling out its other endpoint security services. Yet Fortinet differentiates itself from Palo Alto and its other industry peers by developing its own custom chips, which it claims can counter threats more efficiently than off-the-shelf silicon when paired with its own hardware and software. That strategy also enables Fortinet to tightly control its own supply chain.

Zscaler doesn’t provide any on-site appliances, which take up a lot of space, require constant maintenance, and are expensive to scale. Instead, it only provides its zero trust tools as subscription-based cloud-native services, which are stickier, easy to scale, and constantly updated online. It also cross-sells additional security modules to its existing customers. It currently serves over 7,700 customers globally, including nearly a third of the Forbes Global 2000 companies.

Which company is growing faster?

Fortinet went public in 2009. From 2009 to 2019, it grew its revenue at a compound annual growth rate (CAGR) of 24%. From 2019 to 2023, its revenue increased at a CAGR of 25% from $2.2 billion to $5.3 billion.

Those growth rates were robust, but it expects its revenue to only rise 9% to 11% to $5.8 billion-$5.9 billion in 2024. That would represent its slowest growth rate since its IPO and douse its original hopes for generating $8 billion in annual revenue by 2025. Analysts expect its revenue to rise 10% to $5.9 billion in 2024 and 12% to $6.6 billion in 2025.

Fortinet blames that slowdown on the macro headwinds, slower spending on cybersecurity appliances following a temporary acceleration in 2022, and a cooling upgrade cycle for NGFWs. But the company might also be facing tougher competition from Palo Alto, which has been consolidating its services into a single “platform,” and CrowdStrike (CRWD -3.91%), which bundles together all of its endpoint security services into a cloud-native platform.

Fortinet’s growth is cooling off, but it’s still ramping up its spending on new chips. Analysts expect its adjusted EPS to rise 25% in 2024 but grow just 10% in 2025. That growth rate is stable, but its stock isn’t cheap at 33 times forward earnings.

Zscaler went public in 2018. From fiscal 2019 to fiscal 2024 (which ended this July), its revenue grew at a CAGR of 48%. That rapid expansion was driven by a growing need for zero-trust services to counter both external and internal cyber threats.

For fiscal 2025, Zscaler expects its revenue to rise 20% to 21% — which would also represent its slowest growth rate since its public debut. Like Fortinet, Zscaler blames that deceleration on the challenging macro environment. Analysts expect its revenue to rise 21% in fiscal 2024 but accelerate slightly to 23% growth in 2025. Zscaler’s hypergrowth days might be over, yet it’s still expanding at a faster clip than many of its industry peers.

On the bottom line, the company expects its adjusted earnings to decline 10%-12% in fiscal 2025 as it faces more pricing pressure while ramping up its sales, marketing, and R&D spending. At $157 a share, its stock still looks pretty expensive at 55 times the midpoint of that gloomy forecast. Analysts had previously expected its adjusted EPS to rise 4% in fiscal 2025 and 23% in fiscal 2026 — but they’ll probably slash those forecasts in response to its latest earnings report.

The better buy: Fortinet

Fortinet is growing at a slower clip than Zscaler, but it’s larger and more broadly diversified, and its stock looks more reasonably valued. Fortinet is also firmly profitable on a generally accepted accounting principles (GAAP) basis, while Zscaler is only profitable on a non-GAAP basis, which excludes all of its stock-based compensation expenses.

That’s why Fortinet outperformed Zscaler over the past year, and why it will likely remain the better cybersecurity play for the foreseeable future. Zscaler isn’t down for the count, but its declining profits and high valuation will cap its near-term gains.