Palo Alto Networks (PANW 2.37%) and Fortinet (FTNT 0.62%) are two of the world’s largest cybersecurity firms. The firms initially developed next-generation firewalls (NGFWs) that upgraded conventional firewalls with extra highly effective community filtering instruments, after which expanded their ecosystems with extra safety companies.
Palo Alto Networks at present operates three ecosystems: Strata for NGFW and on-site networking instruments, Prisma for cloud-based companies, and Cortex for AI-driven menace detection instruments. Fortinet provides a “Security Fabric” that brings collectively end-to-end safety instruments for on-premise, cloud-based, and Internet of Things (IoT) units.
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But over the previous 12 months, Palo Alto Networks shares have risen by about 40%, whereas Fortinet shares have fallen by greater than 10%. Will this development proceed?
Difference Between Palo Alto and Fortinet
Palo Alto Networks and Fortinet could seem related on the floor, however their enterprise fashions are completely different: Palo Alto Networks would not manufacture its personal chips, whereas Fortinet develops its personal application-specific built-in circuit (ASIC) chips optimized for its personal {hardware} and software program. The firm claims that its chips give it a bonus over firms that use off-the-shelf chips.
Overall, Palo Alto serves over 80,000 enterprise clients worldwide whereas Fortinet serves over 755,000 clients. However, Palo Alto’s annual income is increased than Fortinet’s because it primarily serves giant enterprises.
Palo Alto Networks has constantly relied on development in Prisma and Cortex, which it collectively refers to as its next-generation safety (NGS) companies, to offset slower development in Strata. Fortinet’s development has been extra balanced throughout its safe operations, safe entry service edge (SASE) and safe networking resolution companies, and it expects the long-term convergence of the cybersecurity, networking and hybrid cloud markets to drive development and convey extra firms onto its Security Fabric.
Both firms face related headwinds
Palo Alto Networks’ income grew 25% in fiscal 2023 (which ended final July), however it expects it to develop simply 16% in fiscal 2024. To fight the slowdown, the corporate is making an attempt to consolidate clients onto its unified platform and grow to be much less reliant on smaller cybersecurity firms for sure companies. But that technique, pushed by free trials and deferred-revenue offers, hasn’t been efficient.
The firm expects its adjusted earnings per share (EPS) to develop 76% in fiscal 2023, however solely 25% to 26% in fiscal 2024.
Fortinet’s income grew 20% in 2023, however now expects it to develop simply 8% to 10% in 2024. The firm blames the slowdown totally on macroeconomic headwinds and a cyclical slowdown in firewall gross sales, however it might be struggling to maintain up with cloud-native leaders Palo Alto Networks and CrowdStrike, in addition to different main opponents.
Fortinet’s sharp slowdown is a priority as a result of the corporate’s administration had beforehand claimed it might generate $8 billion in income by 2025. But to hit that milestone now, the corporate would want to develop its gross sales at 23% yearly from 2023 to 2025. Fortinet’s adjusted EPS rose 37% in 2023, however it now expects development of simply 6% to 10% in 2024 because it ramps up spending on growing new ASIC chips.
Palo Alto Networks trades at 48 occasions ahead earnings, whereas Fortinet trades at a decrease 34 occasions ahead earnings, however I imagine Palo Alto’s inventory deserves the next valuation due to its sooner development and extra diversified enterprise.
Better Buy: Palo Alto Networks
Both Palo Alto Networks and Fortinet are promising investments within the rising cybersecurity market. However, it would not make sense to purchase Fortinet when Palo Alto Networks provides superior development at a barely increased valuation. Therefore, at this level, we imagine Palo Alto Networks will proceed to outperform Fortinet until Palo Alto Networks’ loss-making platform technique falters within the coming quarters.
Leo Sun has invested in CrowdStrike and Palo Alto Networks. The Motley Fool has invested in and recommends CrowdStrike, Fortinet and Palo Alto Networks. The Motley Fool has a disclosure coverage.