In the analysis below, I/O Fund analyst Royston Roche puts three strong cybersecurity stocks up against one another on fundamentals. He assigns 3 points for first place and 2 points for second place and 1 point for third place across each of the fundamental criteria. This helps draw a conclusion on which of the three cybersecurity stocks are strongest based on their financials. We chose these three stocks as they are often neck-and-neck on gains and investor sentiment. Read below to find out which of these contenders will win the face off!
The Cybersecurity sector has been less immune to macro environment challenges like supply chain issues, geopolitical tensions, covid restrictions, and trade wars. The Chief Information Security Officer (CISO) surveys also suggested that enterprise spending will increase in 2022 from the previous year.
The role of Chief Information Security Officers has greatly increased in the last few years, and the recentrecent CISO survey done by Heidrick & Struggles suggests that the security teams have been increasing in size. Another finding from the survey is that CISOs have significant visibility with the board of directors, which shows the growing importance of the cybersecurity sector. Since security breaches can prove costly, corporations and governments will continue to invest in this sector.
We have also recently coveredrecently covered in our free newsletter that the cybersecurity sector continues to lead cloud stocks. This cohort of stocks continue to beat the analyst estimates which is another reason for investors to continue to closely monitor this sector. In this analysis, we compare three cybersecurity companies that all have promising products and provide cybersecurity solutions to modern cloud environments.
Below is a quick recap of the three companies that we have covered in length in our previous articles.
Zscaler’sZscaler’s product has done exceptionally well considering the crowded cybersecurity market. This is due to its best-of-breed, singular focus on security edge and zero trust. Primarily, Zero Trust architecture began to replace VPNs in a meaningful way in 2020 and this has sustained due to the Zero Trust model offering deeper and more scalable protection by eliminating implicit trust.
Zero Trust Security is built on the premise that no one should be trusted within or outside the network. In the traditional security systems, it is difficult to obtain access from outside the network while those located inside the network were trusted. With Zero Trust, these trust assumptions are removed with tools such as multi-factor authentication, giving access for a limited time, and to also verify, authorize and to have a continuous check on all the data points that are given access.
Next up, CrowdStrikeCrowdStrike was founded with the goal of reinventing security for the cloud era. CrowdStrike’s Falcon platform delivers comprehensive breach protection against today’s most sophisticated attacks on the endpoint. Due to the sheer number of endpoints in a corporate network, this is where the majority of attacks are made. Compromised credentials across desktops, laptops, and mobile devices are often the hardest points of access to secure.
CrowdStrike’s AI based security model is focused on collecting large amounts of data, centrally storing it in a single model, and continuously training its algorithms with vast amounts of data. The more data that the Falcon Platform collects, the more intelligent the platform becomes in detecting and stopping breaches.
Our third contender is Cloudflare. What’s remarkable about CloudflareCloudflare is how the company has leveraged its content delivery network footprint to simultaneously be a leader in application and website security. The company further innovated with Zero Trust security, combined with SASE network connectivity, and more recently leveraged the elimination of egress fees for object storage. The latter is the most exciting as Cloudflare has already proven its ability in attracting developers and driving down costs and will now take on AWS head-to-head.
Analyst revenue estimates for the next four quarters
Source: Seeking Alpha
Note: Zscaler has a fiscal year ending in July, CrowdStrike in January, and Cloudflare in December. We have adjusted the information above to reflect the calendar year quarters.
In the above chart, the three companies are ranked based on the revenue estimates for the next four quarters. CrowdStrike is expected to grow the fastest among the three companies in the next four quarters when we average each quarter's growth.
The analysts expect Zscaler’s revenue to grow 48% YoY to $340.7 million in the Q3 CY2022. The company’s revenue grew 61% YoY to $318.1 million in Q2 CY2022 (beat estimates by 4.1%). They expect CrowdStrike's revenue to increase 51% YoY to $575.05 million in Q3 CY2022. CrowdStrike grew its revenue 58% YoY to $535.2 million in Q2 CY2022 (beat estimates by 3.6%).
The analysts expect Cloudflare’s revenue to grow 45% YoY to $250.64 million in Q3 CY2022. The company’s revenue grew by 54% YoY to $234.5 million in Q2 CY2022 (beat estimates by 3.1%). However, all three companies show a deceleration in growth compared to the most recent quarter.
Analyst adjusted EPS estimates for the next four quarters
Source: Seeking Alpha
In the above chart, the three companies are ranked based on the adjusted EPS estimates for the next four quarters. Zscaler ranks first with the highest average growth. However, Cloudflare’s data was not available for all quarters. In this case, I am assigning 3 points to both Zscaler and Cloudflare, because Cloudflare’s EPS is now turning positive. It’s an important milestone when a company turns profitable and the analysis should not overlook this. Below, we look closer at the significant change for Cloudflare in the analyst adjusted EPS estimates beat history chart.
The analysts expect Zscaler’s adjusted EPS to be $0.26 in Q3 CY2022. The company had reported an adjusted EPS of $0.25 (beat estimates by $0.04) in Q2 CY2022 compared to $0.14 for the same period last year. CrowdStrike is expected to report $0.32 in Q3 CY2022. The company had reported adjusted EPS of $0.36 (beat estimates by $0.09) in Q2 CY2022 compared to $0.11 in the same period last year.
Cloudflare is expected to report break-even adjusted EPS in the Q3 CY2022. The company had also reported break-even adjusted EPS (beat estimates by $0.01) in Q2 CY2022 compared to a net loss per share of $0.02 in Q2 CY2021.
Analyst revenue estimates for the next three years
Source: YCharts and Seeking Alpha
The above chart compares the three companies based on the revenue estimates for the next three years. CrowdStrike ranks at the top with the highest compound annual growth rate of 41% in the next three years.
Zscaler’s revenue grew by 62% YoY to $1.09 billion in the FY ending July 2022. Consensus for fiscal year 2023 ending in July is for revenue growth of 38% YoY to $1.50 billion. CrowdStrike’s revenue grew by 66% YoY to $1.45 billion in the FY ending January 2022. Consensus for fiscal year ending in 2023 is for revenue growth of 54% YoY to $2.23 billion. Cloudflare’s revenue grew by 52% YoY to $656.43 million in the FY ending December 2021. Analysts expect Cloudflare’s revenue to grow 48% YoY to $970.73 million in the FY ending December 2022.
Analyst adjusted EPS estimates for the next three years
Source: YCharts and Seeking Alpha
The above chart compares the three companies based on the adjusted EPS estimates for the next three years. CrowdStrike ranks at the top with the highest CAGR of EPS. Also, I would assign 3 points to Cloudflare as the CAGR calculation is not possible since the company previously had negative EPS. However, reaching profitability is a significant milestone for a cloud company.
Analyst revenue estimates beat history
The next benchmark is ranking the three companies based on the number of times the company beat estimates.
Zscaler beat revenue estimates in the last 16 quarters.
Source: Seeking Alpha
CrowdStrike beat revenue estimates in the last 14 quarters.
Source: Seeking Alpha
Cloudflare beat revenue estimates in the last 12 quarters.
Source: Seeking Alpha
All three companies beat revenue estimates on all occasions and have ranked the same with three points.
Analyst adjusted EPS estimates beat history
The next benchmark is ranking the three companies based on adjusted EPS estimates beat.
Zscaler beat the adjusted EPS estimates in the last 16 quarters.
Source: Seeking Alpha
CrowdStrike beat adjusted EPS estimates in the last 14 quarters.
Source: Seeking Alpha
Cloudflare beat adjusted EPS estimates in the 10 out of the last 12 quarters and was in-line once.
Source: Seeking Alpha
In the above benchmark, Zscaler and CrowdStrike get 3 points and Cloudflare gets 1 point.
Price to Sales Ratio
Source: YCharts
The next benchmark is ranking the three stocks based on the P/S ratio. CrowdStrike ranks the top with the lowest P/S ratio of 20.08, followed by Zscaler at 20.74, and Cloudflare at 21.63.
CrowdStrike has also the lowest NTM P/S ratio of 14.66 followed Zscaler and Cloudflare which both have 15.79.
Free Cash Flow Margin
Source: YCharts
The next benchmark is ranking the three companies based on the recent quarter’s free cash flow margin. CrowdStrike ranks at the top with a free cash flow margin of 25%, followed by 24% for Zscaler, and -2% for Cloudflare. Also, CrowdStrike’s free cash flow has been consistently positive, as seen in the chart above.
Operating Margin
Source: YCharts
The last benchmark is ranking based on the recent quarter’s operating margin. CrowdStrike ranks at the top with an operating margin of -9%, followed by Zscaler’s -26%, and Cloudflare’s -28%.
Conclusion
In our cybersecurity face off, CrowdStrike is the winner with 28 points. The company has better forward revenue growth, free cash flow margin, operating margin, and the management has consistently shown its ability to beat estimates.
Second place is Zscaler, which had a strong earnings report. The company’s revenue beat of 4.1% was higher than CrowdStrike’s 3.6% beat and Cloudflare’s 3.1%. Zscaler’s revenue guidancerevenue guidance for the next quarter is $340 million at the mid-point of the guidance, representing a YoY growth of 47.5%. It was significantly higher than the consensus estimates of $326.16 million, a 6% guidance beat for the next quarter.
Third place was Cloudflare, primarily due to the company’s negative free cash flow while peers are much stronger here. Secondly, Cloudflare has reached profitability on a non-GAAP basis in Q3 2021 which is an important milestone for a cloud company yet the margin is thin and the company could slip to unprofitable off any given earnings report. However, tech is led by product and Cloudflare has made some exciting, strategic moves lately, which we've outlined in past analysis. This is a comprehensive fundamental overview, yet truly anything can happen, and each earnings season things change. So, stay tuned as we monitor these three for progress moving forward.