F5 vs. Zscaler

After a solid Q1, we think Zscaler stock (NASDAQ: ZS), a cloud-based security platform, is currently a better pick over its peer – F5 stock (NASDAQ: FFIV). ZS stock trades at 14x trailing revenues, versus 5x for FFIV stock, thanks to Zscaler’s superior revenue growth. Zscaler recently announced its Q1 fiscal 2025 results, with revenue of $628 million and adjusted earnings of $0.77 per share, compared to the consensus estimates of $606 million and $0.63, respectively. The company’s outlook of $2.6 billion in sales and $2.97 (mid-point) in adjusted earnings was also slightly better than the street estimates. Still, the stock dropped 8% following the Q1 announcement.

There could be a few factors at play for this decline, including the fact that the stock had run-up 14% from $182 in early November to $208 on December 2, and investors booked some profits. Also, with the sales growth rate slowing lately, investors may not be willing to assign a higher valuation multiple for the stock. That said, the stock has seen some recovery from levels of $191 on December 2 to $206 now.

Below we discuss why we think ZS is a better pick over FFIV, by comparing a slew of factors, such as historical revenue growth, stock returns, and valuation.

FFIV Stock Has Fared Much Better Than ZS 

FFIV stock has seen a 44% rise from levels of $175 in early January 2021 to around $255 now, while ZS stock has seen little change from $200 to $205 over the same period. This compares with an increase of about 60% for the S&P 500 over this roughly four-year period.

Overall, the performance of FFIV and ZS stocks with respect to the index has been far from consistent. Returns for FFIV stock were 39% in 2021, -41% in 2022, and 25% in 2023, while ZS stock returns were 61%, -65%, and 98%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that both FFIV and ZS underperformed the S&P in 2022.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including, CSCO and META, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Zscaler’s Revenue Growth Has Been Far Superior

F5’s revenue has risen at a 2.7% average annual rate from $2.6 billion in 2021 to $2.8 billion now. In comparison, Zscaler’s average revenue growth rate of 48.1% from $673 million to $2.3 billion over the same period, has been much better.

F5’s revenues growth is being driven by both – services and product – amid the company’s entry into new markets. Zscaler’s revenue growth is led by an increase in customer base as well as rise in subscriptions. The company’s customer base has increased from 5,600 in 2021 to 8,650 now. The company is benefiting from increased subscription revenue toward additional users and add-on services. This trend is expected to continue in the near term.

However, the company’s sales growth rate has slowed from 48% average over the last three years to 21% expected in the next few years. This still fares much better than F5, which is expected to see its top-line expand at a mid-single-digit average annual rate over the next few years.

F5 Is More Profitable, But Zscaler Has A Better Financial Position

F5’s adjusted net income margin improved from 25.8% in 2021 to 28.2% in 2024, while that for Zscaler jumped from 11.2% to 23.4% over the same period. Looking at the last twelve months period, F5’s 28.2% net income margin fares better than 22.9% for Zscaler.

Looking at financial risk, Zscaler seems to have an edge over F5. Both companies have low debt levels. F5’s 2% debt as a percentage of equity is slightly better than 4% for Zscaler. However, the latter’s 58% cash as a percentage of assets is much better than 19% for F5. This implies that Zscaler has more cash cushion.

The Verdict – ZS Is A Better Pick

We see that Zscaler has seen better revenue growth and has more cash cushion. On the other hand, F5 is more profitable and has a slightly better debt position. Now, looking at prospects, we believe ZS stock will offer higher returns in the next three years. FFIV stock trades at 5x trailing revenues, aligning with the stock’s average P/S ratio over the last four years. In comparison, ZS stock trades at 14x trailing revenues, versus the stock’s average P/S ratio of 30x over the last four years. Now, some decline in valuation multiple for ZS seems justified, given the fall in revenue growth rate. It may likely fall further to more reasonable levels over the coming years. However, a decline in P/S ratio will be more than offset by growth in sales, given the expected surge in revenues, and thereby resulting in higher levels for ZS stock.

While ZS stock may outperform FFIV, it is helpful to see how F5’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 12/5/2024
[2] Cumulative total returns since the end of 2016

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