Zscaler (NASDAQ: ZS) has garnered acclaim as a rising star in the cybersecurity realm, pioneering zero trust security solutions that upend traditional security paradigms.
Challenged by competitors like CrowdStrike, Palo Alto Networks, and Fortinet, Zscaler’s forward P/E ratio hovering near 70 may give investors pause. The burning question remains – is it too late to join the Zscaler stock wagon? Let’s dissect the facts to unravel the truth.
The Rise of Zscaler
Zscaler’s ascent to cybersecurity eminence stems from its pioneering role in zero trust security. The advent of cloud technology and the proliferation of wireless devices precipitated a seismic shift in cybersecurity, rendering traditional firewalls obsolete.
Zero trust security, in response to this shifting landscape, treats every user as a potential threat and employs user attributes like organizational rank, location, and device specifics to govern access. This approach limits potential damage in the event of a security breach.
Further, market trends reveal a preference among customers to consolidate security acquisitions with a single vendor. Zscaler steps up to the plate by offering a suite of products, including endpoint security and cloud firewalls, setting the stage for broader customer engagement beyond zero trust security.
Notably, Fortune Business Insights predicts a robust 14% compound annual growth rate for the global cybersecurity market up to 2030, implying a rising tide that could lift all boats in the industry.
Financial Hurdles and Triumphs
Despite its cybersecurity prowess, Zscaler faces financial headwinds reflected in its performance metrics. In the first two quarters of fiscal 2024 (ending Jan. 31), Zscaler achieved over $1 billion in revenue, marking a robust 38% increase over the same period in fiscal 2023.
Although the net revenue retention dropped to 117% in fiscal Q2, the figure indicates that the average long-term customer spent 17% more on Zscaler products compared to the previous year, showcasing healthy revenue growth.
However, profitability remains a thorny issue for Zscaler. Contrary to most peers, Zscaler has yet to turn a profit. In the first half of fiscal 2024, the company reported a loss of nearly $62 million, a slight improvement from the $126 million loss in the same period in fiscal 2023.
The specter of net losses looms large for investors. Notwithstanding, Zscaler’s ability to generate $326 million in positive free cash flow in the same period, propelled by $270 million in stock-based compensation expenses, softens the blow and fuels investor optimism.
Moreover, while Zscaler’s valuation may appear lofty, with a P/S ratio around 14, it pales in comparison to CrowdStrike. Despite this, its lack of a P/E ratio may steer investors towards its competitors. Nevertheless, the stock’s remarkable 60% surge over the past year indicates enduring investor interest.
ZS PS Ratio data by YCharts
The Verdict on Zscaler Stock
Given Zscaler’s current standing, the opportune moment to invest may not have passed. However, the ultimate litmus test lies in its comparative value against industry peers. With the cybersecurity sector poised for rapid expansion and Zscaler’s zero trust security leadership, the trajectory points towards revenue and stock price appreciation.
The pivotal question remains – can Zscaler outshine its competitors? Sporting a higher sales multiple than most counterparts aside from CrowdStrike, investors might opt for a more cost-effective stock showing profitability. This backdrop positions Zscaler as a riskier but potentially rewarding investment choice.
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Will Healy maintains positions in CrowdStrike and Zscaler. The Motley Fool holds positions in and endorses CrowdStrike, Fortinet, Palo Alto Networks, and Zscaler. The Motley Fool upholds a disclosure policy.
The insights expressed herein represent the author’s views and do not necessarily align with those of Nasdaq, Inc.
