Fortinet or FireEye: Which Is the Better Cybersecurity Play?

Fortinet (NASDAQ: FTNT) and FireEye (NASDAQ: FEYE) have turned out to be solid bets for investors in 2018, though to widely varying degrees. Fortinet's rapid growth has sent its shares rocketing higher, while FireEye is reinventing itself after facing sales challenges earlier in the year that led to a mini-crisis.

However, the status quo seems to be changing. Fortinet has been hurt by the broader market slowdown of late despite some favorable company-specific news. FireEye, on the other hand, is in resurgent mode thanks to a solid set of results that have led investors to believe it is capable of stepping on the gas. Does this make FireEye a better cybersecurity bet than Fortinet, or is there more to this matchup than meets the eye?

The case for Fortinet

Investors don't need to worry about Fortinet's pace of growth. Its non-GAAP net income shot up nearly 71% in the third quarter on revenue growth of 21.3%. The company expects to sustain this momentum in the current quarter, as the midpoint of its revenue guidance indicates that the top line will grow close to 20% annually. Non-GAAP net income is expected to increase in the range of 56%-62%.

Looking past these short-term guidance figures, a closer look at Fortinet's key metrics indicates that it is built for long-term growth. For instance, the company's customers are spending more money on its products and services. This is evident from the fact that Fortinet's $250,000-plus deals increased 27% annually during the latest quarter. Meanwhile, the amount of $1 million-plus transactions was consistent in number over the prior-year period, but the value of the total dollar billings of these deals shot up 32%.

Fortinet customers are also signing longer contracts. The company's average contract length increased one month last quarter to 26 months. The net result of all these gains was that Fortinet's deferred revenue increased 27% to $1.5 billion. But the more important thing to note here is that Fortinet's long-term deferred revenue grew at a much faster pace of nearly 38% year over year, as compared to the short-term deferred revenue growth of 19%.

This pattern indicates that Fortinet is securing its growth for the long run. Deferred revenue is recognized on the income statement once services are actually delivered, as it is the money received in advance by a company. This metric is useful in determining the forward demand for companies selling subscription services. An increase in long-term deferred revenue means that customers are buying its subscriptions for longer time periods.

The case for FireEye

Unlike Fortinet, FireEye's growth hasn't been all that explosive. The company clocked annual revenue growth of 7% last quarter and posted a non-GAAP profit of $11.8 million, compared to the prior-year period's $2.7 million loss. What's more, the guidance indicates that FireEye's revenue will grow in the single digits in the near term, though its focus on controlling costs could lead to stronger earnings power going forward.

FireEye is expected to post non-GAAP earnings of $0.08 per share this year. Its earnings are expected to more than double to $0.19 per share in the next fiscal year. This will be a major improvement given that it incurred a $0.16-per-share loss last year. But beyond this, FireEye cannot match Fortinet's growth in other areas.

For instance, FireEye's customer count has increased just 8% through the first three quarters of the year. Its $1 million-plus transactions were flat in the third quarter after a nice improvement in the preceding one. Additionally, its weighted average contract length fell slightly on a year-over-year basis last quarter to 28.6 months, though it should be noted that the metric has improved sequentially.

Deferred revenue growth hasn't been all that great either, as this metric grew just 1.3% last quarter. Long-term deferred revenue actually declined on an annual basis, which is in stark contrast to what we saw at Fortinet.

So FireEye's growth is mediocre compared to Fortinet's. However, the company is steadily getting its business back on track and could post solid bottom-line growth going forward.

The verdict

Fortinet seems to be superior to FireEye. Of course, FireEye has started gaining momentum lately, but Fortinet is already enjoying a period of high growth. Just like FireEye, Fortinet is also expected to see a nice earnings boost going forward.

The decisive factor, however, is the valuation. While FireEye investors will have to pay 94 times earnings estimates to buy into its earnings growth, Fortinet is much cheaper, with a forward price-to-earnings ratio of just 34. As such, Fortinet is the better cybersecurity play of the two companies thanks to the many advantages that it brings to the table.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends FireEye and Fortinet. The Motley Fool has a disclosure policy.