The continuation of work-from-home structures, ongoing digital transformation, the proliferation of smart devices, and growing interest in cryptocurrencies has increased users’ exposure to cyberattacks, ransomware attacks, and data breaches. Therefore, the cybersecurity industry has been witnessing increasing demand for appropriate solutions.

Investors’ interest in this space is evident from the First Trust Nasdaq Cybersecurity ETF’s (CIBR) 15.4% gains versus the SPDR S&P 500 Trust ETF’s (SPY) 14.6% returns over the past nine months. The global cybersecurity market is expected to grow at a 13.4% CAGR to reach $346 billion by 2027. 

Fortinet, Inc. (FTNT) and Qualys, Inc. (QLYS) are two prominent players in the cybersecurity industry. FTNT provides broad, integrated, and automated cybersecurity solutions and offers security subscription, technical support, professional and training services worldwide. QLYS provides information technology security risk and compliance management solutions, web application scanning, malware detection, and associated security products. Both companies serve technology, financial services, healthcare, media, manufacturing, retail, education, transportation industries, and governmental agencies through direct sales forces and a network of channel partners.

While QLYS returned 3% over the past year, FTNT has surged 115%. But which of these stocks is a better pick now? Let us find out.

Latest Developments

In an announcement dated December 20, 2021, seven service providers – Convergia, Eastern Communications, Halo Global, Lintasarta, Ooredoo Qatar, PLDT, and Transtelco – have added FTNT’s Fortinet Secure SD-WAN to their managed service portfolios. FTNT’s industry-leading Secure SD-WAN solution enables MSSPs to deliver high-value security-driven networking services to customers, improve their digital acceleration and grow their business by uniquely meeting customer needs. FTNT expects to witness a wide market reach in the coming months.

On December 17, 2021, QLYS announced the free availability of its Web Application Scanning (WAS) solution for 30 days to help companies protect against the Apache Log4Shell zero-day RCE vulnerability, which the U.S. officials call “one of the most serious flaws they’ve seen.” It poses potential threats for almost every single web application, and Web Application Scanning capabilities are essential to detect these vulnerabilities as they simulate the attack of Log4Shell exploits. QLYS’ WAS will likely witness high demand in the next 30 days.

Recent Financial Results

FTNT’s total revenue for its fiscal 2021 third quarter ended September 30, 2021, increased 33.2% year-over-year to $867.20 million. The company’s total gross profit came in at $656 million for the quarter, representing a 28.2% year-over-year improvement. Its non-GAAP operating income came in at $223.60 million, up 25.2% from the prior-year period. FTNT’s non-GAAP net income came in at $165.90 million, up 14.1% from their year-ago period. Its non-GAAP EPS increased 12.5% year-over-year to $0.99. The company had $1.85 billion in cash and cash equivalents as of September 30, 2021.

For its fiscal 2021 third quarter ended September 30, 2021, QLYS’ revenues increased 12.7% year-over-year to $104.93 million. The company’s non-GAAP gross profit came in at $85.06 million, representing a 13.7% rise from the prior-year period. Its non-GAAP income from operations came in at $43.11 million for the quarter, up 12.3% from the prior-year period. QLYS’ non-GAAP net income came in at $34.15 million, indicating an 8.8% increase from the prior-year period. Its non-GAAP EPS increased 10.4% year-over-year to $0.85. The company had $145.74 million in cash and cash equivalents as of September 30, 2021.

Past and Expected Financial Performance

FTNT’s revenue and net income grew at CAGRs of 22.3% and 66.3%, respectively, over the past three years. The company’s levered free cash flow has grown at a CAGR of 30.5% over the past three years.

Analysts expect FTNT’s EPS to increase 16.7% year-over-year for the fiscal year 2021 ended December 31, 2021, and 17.6% in 2022. Its revenue is expected to grow 28.6% year-over-year in fiscal 2021 and 18.5% in 2022. The company’s EPS is expected to grow at a rate of 16.8% per annum over the next five years.

In comparison, QLYS’ revenue and net income increased at a CAGR of 14% over the past three years. The company’s levered free cash flow increased at a CAGR of 10.7% over the past three years.

QLYS’ EPS is expected to rise 10.8% year-over-year in the fiscal year 2021 ended December 31, 2021, and 4.7% in 2022. The company’s revenue is expected to increase 13% year-over-year in fiscal 2021 and 13.2% in 2022. Analysts expect the company’s EPS to grow at an 8% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, FTNT is currently trading at 14.80x, 36.4% higher than QLYS’ 10.85x. In terms of forward EV/EBITDA, QLYS’ 23.47x compares with FTNT’s 52.20x.

Profitability

FTNT’s trailing-12-month revenue is almost 7.9 times QLYS’. However, QLYS is more profitable, with a 78.1% gross profit margin versus FTNT’s 76.9%.

Furthermore, QLYS’ EBITDA margin and levered free cash flow of 30% and 38.3% compare with FTNT’s 21.6% and 33.6%, respectively.

POWR Ratings

While QLYS has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, FTNT has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both QLYS and FTNT have an A grade for Quality, consistent with their higher-than-industry profitability ratios. QLYS’ 38.3% trailing-12-month levered free cash flow margin is 227% higher than the 11.7% industry average. FTNT has a 33.6% trailing-12-month levered free cash flow margin, 186.7% higher than the industry average of 11.7%.

QLYS has a C grade for Value, in sync with its slightly higher-than-industry valuations. QLYS has a 25.78x forward Price/Cash Flow, 11.4% higher than the 23.14x industry average. FTNT’s D grade for Value reflects its overvaluation. FTNT’s 37.27x forward Price/Cash Flow is 61% higher than the industry average of 23.14x.

Of 27 stocks in the Software - Security industry, QLYS is ranked #6, FTNT is ranked #10.

Beyond what we have stated above, our POWR Ratings system has also rated QLYS and FTNT for Sentiment, Momentum, Stability, and Growth. Get all QLYS ratings here. Also, click here to see the additional POWR Ratings for FTNT.

The Winner

Both FTNT and QLYS are well-positioned to capitalize on the growing demand for advanced cybersecurity solutions. However, higher profitability and lower valuations make QLYS a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software - Security industry.

FTNT shares were trading at $317.07 per share on Monday afternoon, up $2.41 (+0.77%). Year-to-date, FTNT has declined -11.78%, versus a -2.72% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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