Which Cyber ​​Security Stock Is Better?

In this article, we evaluated two cybersecurity stocks: CrowdStrike Holdings ( CRWD ) and Fortinet ( FTNT ). A closer look suggests a bullish long-term view for CrowdStrike and a neutral view for Fortinet.

CrowdStrike provides advanced cloud-based endpoint security through its Falcon platform, using a subscription-based software-as-a-service (SaaS) model that offers various cloud modules. Meanwhile, Fortinet provides cyber and network security solutions aimed at securing people, devices and data everywhere through its portfolio of 50 enterprise-grade products.

CrowdStrike shares are down 27% over the past three months, though they’re still in the green year-to-date, up 12%. The stock remains up 69% over the past year. Meanwhile, Fortinet shares are up 29% over the past three months and are up 32% year-to-date.

The collapse of CrowdStrike and the rise of Fortinet can be attributed to the same thing: the July 19 global outage of airlines and various industries, which was blamed on a CrowdStrike update that crashed computers around the world.

So a key question now is whether CrowdStrike presents a buying opportunity, but there’s a lot to consider, especially when it comes to how the company stacks up to Fortinet.

CrowdStrike Holdings

At a P/E of 409x, CrowdStrike certainly isn’t cheap, but its forward P/E of 78.1x suggests its earnings will grow. Although there is a combination of positive and negative factors, the positives easily outweigh the negatives. Thus, a bullish long-term view seems appropriate because of the company’s extreme growth and because the stock hasn’t been this cheap on a P/E basis since it became profitable.

One thing that sets CrowdStrike apart from Fortinet is that it offers its services entirely through the cloud, while Fortinet offers end-to-end solutions that include on-premise devices. CrowdStrike’s Falcon Platform is designed to strengthen cybersecurity solutions and stop breaches. The company’s platform collects and integrates data across an enterprise, including cloud workloads, endpoints and third-party systems.

While CrowdStrike’s lack of on-premises solutions might seem like a limitation, it actually positions the company favorably given the growing focus on cloud-based cybersecurity. On-premises devices are often expensive and difficult to scale, which makes CrowdStrike’s cloud-based offerings all the better, future-proofing its business model.

Of course, some things about CrowdStrike are not widely known. For example, noted growth investor Louis Navellier has suggested that Amazon ( AMZN ) founder Jeff Bezos may be involved with CrowdStrike in some capacity, though the details remain unclear. Given Bezos’ history with Amazon, his involvement would be seen as a significant positive for CrowdStrike’s future.

The story continues

However, one potential problem involves CRWD CEO George Kurtz, who was Chief Technology Officer at McAfee in 2010 during a major outage caused by a botched security update. Kurtz recently faced scrutiny again after CrowdStrike experienced its own outage. However, his experience in handling similar crises could be an advantage, as he is likely familiar with strategies to effectively navigate such issues.

Unfortunately, another big negative is that CrowdStrike insiders unloaded shares as the stock fell. Insiders normally sell into power. Thus, the fact that they achieved informative sales of $25.9 million in the last three months raises concerns about confidence in the company’s near-term performance.

However, despite the global outage, CrowdStrike apparently lost almost no customers, at least according to Jim Kramer. Wedbush analysts estimated that less than 5 percent of CrowdStrike’s customers will switch providers, indicating that the outage will have minimal impact on the company’s long-term sales.

Importantly, CrowdStrike is priced as a growth stock, while Fortinet is not. CrowdStrike’s revenue is expected to grow 25% to 30% in the coming years, roughly in line with its most recent quarterly sales growth. CrowdStrike has also enjoyed a 70% compound annual growth rate (CAGR) since 2017 as its revenue exploded from $50 million to $3.5 billion over the past 12 months.

Thus, CrowdStrike deserves a growth premium over Fortinet, although the size of the premium is debatable. However, there is no doubt that the company will bounce back from the recent disruption, so it would be wise to view the latest dip as a buying opportunity.

What is the price target for CRWD stock?

CrowdStrike Holdings has a Strong Buy consensus rating based on 29 buy and four hold ratings assigned in the past three months. At $327.25, CrowdStrike’s average stock price target implies a potential upside of 18.94%.

Fortinet

At a P/E of 45.8x, Fortinet is underpriced for the tremendous growth expected from CrowdStrike. However, the current P/E is well below the average P/E of 61.7x since November 2019. A balance of positive and negative factors suggests that a neutral view may be appropriate for Fortinet.

Fortinet’s on-premises hardware suggests that its customer base could be stickier than CrowdStrike’s because it’s more difficult to replace old hardware. However, switching to a cloud-based provider like CrowdStrike could also have its benefits due to lower costs and not having to keep up with hardware upgrades.

Fortinet is also showing signs of a successful pivot to its non-firewall solutions, which it announced last year. CrowdStrike also offers Secure Access Service Edge (SASE) services, which puts Fortinet in direct competition with CrowdStrike. Furthermore, Fortinet is moving into security operations (SecOps), another newer and more attractive offering than its legacy firewall solutions.

Unfortunately, Fortinet just isn’t growing as fast as CrowdStrike, with a CAGR of 24% between 2017 and 2022. While the company has experienced a CAGR of 25% in billings over this period, its revenue growth has slowed significantly in 2023, increasing by only 20%. This indicates a marked slowdown compared to CrowdStrike’s performance. What’s more, Fortinet’s billings rose just 14%, signaling that the company may have had its day in the sun — though it certainly isn’t going anywhere anytime soon.

Finally, the recent rally in its stock also suggests that this might not be a great time to buy Fortinet stock. I might become more constructive on the stock if the price falls, especially if the company continues to report strong earnings. Thus, I would take a wait and see approach for now.

What is the price target for FTNT stock?

Fortinet has a consensus rating of Moderate Buy based on six Buy, 16 Hold and zero Sell ratings assigned in the last three months. At $74.11, Fortinet’s average price target implies a downside potential of 3.11%.

Conclusion: bullish on CRWD, neutral on FTNT

Both CrowdStrike and Fortinet are great cybersecurity plays in the long run – as long as you can beat their ratings. Both stocks have enjoyed explosive share price appreciation over the long term. CrowdStrike has grown 17% over the past three years and 395% over the past five years. Meanwhile, Fortinet is up 34% over the past three years, 413% over the past five years, and 1,114% over the past decade. (Fortinet is much older compared to emerging player CrowdStrike.)

However, CrowdStrike is the clear winner of this pair as it appears to have more near-term opportunities than Fortinet. As a result, a wait-and-see approach looks best for Fortinet, especially in light of the stock’s recent rally. In the meantime, it might be a good idea to dip buy into CrowdStrike.

Disclosure