Digitization of operations and growing adoption of cloud computing increased business’ exposure to large-scale data breaches. This has pushed businesses to increase their investments in cybersecurity solutions, helping the industry thrive. Moreover, rising government investments in cybersecurity because of potential cyberattacks from Russia due to escalating sanctions on the nation should benefit the cybersecurity industry. The global cybersecurity market is expected to grow at a 10.1% CAGR to $210 billion by 2028.
Fortinet, Inc. (FTNT) and Radware Ltd. (RDWR) are two prominent players in the cybersecurity space. FTNT provides broad, integrated, and automated cybersecurity solutions and offers security subscriptions, technical support, and professional and training services worldwide. It serves channel partners and customers in telecommunications, technology, financial services, education, retail, manufacturing, and healthcare. On the other hand, Israel-based RDWR provides cyber security and application delivery solutions for virtual, cloud, and software-defined data centers worldwide. It sells its products primarily to independent distributors, including value-added resellers, OEMs, and system integrators.
FTNT is a winner with 5.7% gains over the past week versus RDWR’s 5.7% loss. But which of these stocks is a better pick now? Let’s find out.
Click here to checkout our Cybersecurity Industry Report for 2022
Latest Developments
On May 4, 2022, FTNT announced a suite of new FortiGate appliances that features ASIC-based performance acceleration and integrated AI-powered FortiGuard Security Services to support campus, branch, and hybrid data center environments. FortiGate Network Firewalls enhances the industry’s most comprehensive converged networking and security platform powered by FortiOS to deliver advanced security seamlessly integrated with modern networking capabilities. This will help organizations generate better ROI, enhanced protection against advanced threats, and better user experience.
On May 3, 2022, RDWR announced the spinoff of its Cloud Native Protector (CNP) business to form a new company called SkyHawk Security, a leader in enterprise cloud threat detection and protection using its AI/ML technologies. An affiliate of leading technology investment firm Tiger Global Management will make a $35 million strategic external investment to accelerate SkyHawk Security’s development and growth opportunities. SkyHawk Security’s easy-to-deploy, agentless solution identifies and prevents compliance violations, cloud security misconfigurations, excessive permissions, and malicious activity in the cloud. It should witness high demand in the coming months.
Recent Financial Results
FTNT’s total revenue for its fiscal 2022 first quarter ended March 31, 2022, increased 34.4% year-over-year to $954.80 million. The company’s gross profit came in at $701 million, up 26.6% from the prior-year period. Its non-GAAP operating income came in at $210.20 million, indicating a 20.9% year-over-year improvement. While its non-GAAP net income increased 14.4% year-over-year to $155.10 million, its non-GAAP EPS grew 16.1% to $0.94. As of March 31, 2022, the company had $923.50 million in cash and cash equivalents.
For its fiscal 2022 first quarter ended March 31, 2022, RDWR’s revenues increased 10.4% year-over-year to $73.71 million. The company’s non-GAAP gross profit came in at $61.32 million, up 11.5% from the prior-year period. Its non-GAAP operating income came in at $9.61 million, representing a 28.4% rise from the year-ago period. Its non-GAAP net income came in at $8.84 million, indicating a 10.2% year-over-year improvement. Its non-GAAP EPS came in at $0.19, representing an 11.7% rise from the prior-year period. The company had $54.48 million in cash and cash equivalents as of March 31, 2022.
Past and Expected Financial Performance
Over the past three years, FTNT’s revenue and EBITDA have increased at CAGRs of 6.7% and 7.9%, respectively.
FTNT’s EPS is expected to increase 27.8% year-over-year in fiscal 2022, ending December 31, 2022, and 20.2% in fiscal 2023. Its revenue is expected to grow 30.9% in fiscal 2022 and 21% in fiscal 2023. Analysts expect the company’s EPS to grow at a 20.8% rate per annum over the next five years.
Over the past three years, RDWR’s revenue and EBITDA have increased at CAGRs of 24.1% and 35.7%, respectively.
Analysts expect RDWR’s EPS to decline 1.2% year-over-year in fiscal 2022, ending December 31, 2022, and 16.2% in fiscal 2023. Its revenue is expected to rise 8.7% year-over-year in fiscal 2022 and 9.6% in fiscal 2023. Analysts expect the company’s EPS to grow at a 15% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, FTNT is currently trading at 10.04x, 293.7% higher than RDWR’s 10.04x. In terms of forward EV/EBITDA, RDWR’s 15.53x compares with FTNT’s 36.16x.
Profitability
FTNT’s trailing-12-month revenue is almost 12.2 times RDWR’s. FTNT is also more profitable, with a 21.4% EBITDA margin versus RDWR’s 10.3%.
Furthermore, FTNT’s net income margin and ROA of 17.8% and 7.7% compare with RDWR’s 2.6% and 2.1%, respectively.
POWR Ratings
While RDWR 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.
RDWR has been graded a B in terms of growth, which is in sync with its higher-than-industry growth rates over the past year. RDWR’s EBIT has grown 150.3% over the past year, 400.2% above the industry average of 30%. FTNT’s C grade for Growth reflects its lower-than-industry growth rates. FTNT’s EBIT has grown 26.9% over the past year, 10.5% lower than the 30% industry average.
RDWR has been graded a C for Value, in sync with its slightly higher-than-industry valuation ratios. RDWR’s 18.01x forward EV/EBIT is 15.6% higher than the 15.59x industry average. FTNT’s D grade for Value is in sync with its overvaluation. FTNT has a 39.89x forward EV/EBIT, 156% higher than the 15.59x industry average.
Of the 31 stocks in the Software - Security industry, RDWR is ranked #2, while FTNT is ranked #7.
Beyond what we have stated above, our POWR Ratings system has graded RDWR and FTNT for Sentiment, Quality, Stability, and Momentum. Get all RDWR ratings here. Also, click here to see the additional POWR Ratings for FTNT.
The Winner
Growing investments in cybersecurity solutions are expected to benefit prominent cybersecurity solutions providers RDWR and FTNT. However, a relatively lower valuation makes RDWR a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Software - Security industry.
FTNT shares were trading at $275.52 per share on Monday afternoon, down $6.03 (-2.14%). Year-to-date, FTNT has declined -23.34%, versus a -15.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
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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