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Cloudflare vs. Zscaler: Which Cybersecurity Stock is A Better Pick?

In recent years, the technology industry has gone through a transition wherein companies are moving from on-premises products and services to cloud-based services. This has also led to more cyber-attacks on cloud-based infrastructure, creating a need for cloud-based security solutions.

The global cloud security market could be worth $68.5 billion by 2025, according to a MarketsandMarkets research report indicating a compounded annual growth rate (CAGR) of 14.7% between 2020 and 2025.

Considering this scenario, let us compare two companies providing cloud-based security solutions, Cloudflare and Zscaler, using the TipRanks stock comparison tool, and see how Wall Street analysts feel about these stocks.

Cloudflare (NET)

Shares of Cloudflare have soared 10.5% in the past month, riding high on the back of strong Q3 results. The website security and web infrastructure company saw its revenues jump 51% year-over-year to $172.3 million, coming in ahead of the consensus estimate of $165.7 million.

This rise in revenues was largely driven by higher traction among the company’s large customers, which rose 71% year-over-year. At the end of Q3, NET had 1,260 large customers. Cloudflare defines large customers as those who pay the company more than $100,000 each year.

It is important here to note that the company generates revenues through subscriptions to access its network and products. It operates a freemium business model where its free customers help it to “attract developers, customers, and potential employees,” according to the company.

Needham analyst Alex Henderson approves of this developer-focused, product-led go-to-market business growth model of the company and believes that this model, along with its free users, results in a “natural demand-pull up-market” where its free users “willingly sample new features and functionality as alpha testers and harden solutions before going-live.”

Another positive for the stock, according to Henderson, is the sheer number of key product announcements by the company, which are difficult to keep pace with. The analyst drew parallels with Amazon (AMZN) in this regard, particularly during the 2012 to 2015 timeframe, when it was introducing a slew of new products.

The analyst added, “The similarities to this innovation engine is one of the reasons we have deep conviction Cloudflare can be a very large company. We believe the flow of new products hearkens back to Cloudflare’s large user community and helps drive Dollar-Based Net Retention above 120%.”

The analyst is bullish about the stock with a Buy rating and raised the price target from $140 to $245 (24.1% upside) on the stock.

Cloudflare delivered an adjusted net income of $1.4 million, achieving a major milestone of breaking even in Q3 versus a loss of $5.8 million in the same period last year. Analysts were expecting a loss of $0.04 per share in Q3.

Matthew Prince, Cloudflare’s Co-Founder and CEO, added on its earnings call that the company anticipates hovering “just below or just above breakeven likely for years to come.” The company is also targeting an operating margin of 20% over the long term.

Even Henderson believes that NET has the potential for its revenues to grow between 30% and 50% over the next three to five years “and sustain Gross Margins in the mid-to-high 70% range while delivering operating leverage.”

The analyst noted that Cloudflare is at “an inflection point in its business model” as “it is pivoting from network investment and a freemium customer capture model to the development of deeper service functionality and a greater focus on large Enterprise adoption.”

Alex Henderson is ranked by TipRanks as #29 out of more than 7,700 analysts. Other Wall Street analysts are cautiously optimistic about Cloudflare, with a Moderate Buy consensus rating based on 6 Buys and 9 Holds. The average Cloudflare price target of $208.08 implies 5.4% upside potential to current levels.

Zscaler (ZS)

Zscaler is expected to announce its fiscal first-quarter results on November 30. In fiscal Q1, the company anticipates revenues to be in the range of $210 million to $212 million while adjusted income from operations is expected to be between $18 million and $19 million.

It is important to note here that the company earns revenues primarily from subscription sales that provide customers access to its cloud platform, along with related support services.

The company’s portfolio of comprehensive solutions includes secure access to the Internet and software-as-a-service (SaaS) with Zscaler Internet Access (ZIA), segmentation of workload, management of the user-to-application experience with Zscaler digital experience (ZDX), and secure access to internal applications with Zscaler private access (ZPA).

Deutsche Bank analyst Patrick Colville remained optimistic about Zscaler’s Q1 results, as the analyst’s channel checks indicated that the company seems to be “executing well and we saw no signs of a tone downtick in Q1 compared with last quarter.”

Moreover, according to the analyst, ZS also seems to be winning market share from Secure Web Gateway (SWG) vendors like Broadcom (AVGO).

Furthermore, Colville pointed out that in an “upside case,” ZS could earn revenues in excess of $239 million, up 65% year-over-year, bolstered by the fact that “pipelines indicate no signs of any slowdown in to the end of CY21.”

In fact, according to the analyst, year-to-date, the company’s reseller revenues are up 35% this year, “benefiting from the shift to FWaaS [firewall-as-a-service] and the shift to hybrid-remote.”

Colville particularly noted that against the “robust SASE [secure access service edge] demand backdrop,” Zscaler will continue to benefit “from continued elevated cybersecurity spend, hybrid working and FW-as-a[1]Service adoption.”

As a result, Colville reiterated a Buy rating and raised the price target from $325 to $400 (16.8% upside) on the stock.

Patrick Colville has an average return of 30.5% per rating, according to TipRanks. Other Wall Street analysts are cautiously optimistic about Zscaler, with a Moderate Buy consensus rating based on 17 Buys and 7 Holds. The average Zscaler price target of $333.13 implies 2.7% downside potential to current levels indicating that the stock could have overshot its valuation.

Bottom Line

Analysts are cautiously optimistic about both stocks, and it appears that both companies are poised for growth. However, based on the upside potential over the next 12 months, Cloudflare seems to be a better Buy.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >