ZS - Zscaler Vs. Crowdstrike: Which Of These Two Great Companies To Buy Now
2024-06-28 10:18:23 ET
Summary
- Zscaler and Crowdstrike are leaders in two different segments of the cyber security space.
- Both companies have achieved rapid growth, with the advantage slightly to Crowdstrike recently.
- Both companies are achieving significant free cash flow margins.
- Zscaler shares have seen a material valuation compression, both on a relative and absolute basis.
- At this point with an EV/S just half or less that of Crowdstrike, Zscaler shares are exceptionally attractive for long-term growth investors.
Investing in Cybersecurity can be hard-Valuation is still important
These days, or so it seems, the question in tech investing is more about investing in AI and whether or not to focus investments on hardware, and specifically Nvidia ( NVDA ) and a few analog companies or to try to choose a balanced portfolio of high growth names. I am not going to specifically address that question in this article, although I recognize that is what many investors are most interested in. I will simply observe that while software companies at this point can’t rival the growth and profitability of Nvidia, in the long term the demand for GPUs, while likely to show outsize growth for the next several quarters, is inevitably a precursor for demand for software to run on those GPUs, assembled into servers as the foundation for AI apps. I read, recently, that while something in excess of $50 billion of GPUs that are being used in AI servers have been sold, AI software revenue has been around $3 billion. Indeed some of that GPU demand is coming from software companies who are expanding their own networks rapidly to deal with anticipated demand for capacity necessary to support generative AI applications.
Generative AI applications, as they are deployed, will have to be protected, and the data used for the large language models that are crucial to run generative AI apps has to be secured. Although at this point, the demand tailwind from that trend is not really in evidence, it is likely to be a powerful tailwind for cybersecurity demand from enterprises and organizations almost universally. While both Crowdstrike ( CRWD ) and Zscaler ( ZS ) have their own generative AI applications to enhance the performance of their cybersecurity solutions and to automate internal processes, those revenues are not going to be substantial in the next year or so, at least in my opinion.
This is an article trying to focus on the question of which of these cyber security leaders is the better investment. These companies are not competitors, and almost certainly will not be in the foreseeable future. Indeed, they are partners and will co-sell deals , mainly on a tactical basis. Both Crowdstrike and Zscaler are excellent companies in terms of their competitive positioning, their business model and their execution capability-although some observers are a bit concerned about ZS on the later score and they both are dominant in their component of the cyber-security world.
Both companies have enjoyed prodigious growth, and I believe that they will continue to do so for the foreseeable future. But these days, I find the investment merits of Zscaler far outweigh those of Crowdstrike and after many years as a shareholder, my portfolio is currently void of CRWD shares. Indeed, in looking at valuation as a function of both growth and free cash flow margins, I believe that ZS shares to be amongst the top choices in my investment universe. This is an article comparing and contrasting the business and investment attributes of both Zscaler and Crowdstrike over the next 12 months and beyond . I recommend the purchase of ZS shares at this time and at this price. ...
Zscaler Vs. Crowdstrike: Which Of These Two Great Companies To Buy Now