Company Overview

Zscaler is a trailblazer in cloud-based security, offering a suite of services designed to securely connect users, devices, and applications in a distributed environment. Its flagship offerings, such as Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA), are central to its Secure Access Service Edge (SASE) platform, which is increasingly vital as enterprises shift towards cloud computing and remote work.

Market Performance and Strategy

Zscaler has been growing robustly, with analysts noting a 34% year-over-year increase in billings and federal new Annual Contract Value (ACV) growth over 90%. This growth trajectory is expected to continue, with the company targeting a $5 billion Annual Recurring Revenue (ARR) milestone, reflecting confidence in its business model and market opportunities. Analysts believe that Zscaler's expansion strategy, including its leadership in zero trust security, positions the company well within a $72 billion Total Addressable Market (TAM).

Financial Health and Guidance

Analysts have recognized Zscaler's solid financial performance, with revenue guidance increased to a midpoint of approximately $2,095 million, indicating a year-over-year growth of about 30%. Operating margins have exceeded guidance, and free cash flow (FCF) margins are expected in the low-20% range for the full year. However, the company's net retention rate has seen a slight decrease due to macro challenges, although it is expected to stabilize.

Product Segments and Innovation

Zscaler's product segments have been a highlight, with nearly half of new logos in a recent quarter coming from consolidated ZIA, ZPA, and ZDX deals. The company's strategy of focusing on high-priority CIO initiatives and taking market share through its zero trust leadership position has been well-received. Its emerging products, like ZDX, Zscaler for Workloads, and data protection offerings, are outpacing competitors and are expected to grow further in FY24.

Competitive Landscape

In the competitive landscape, Zscaler has been compared favorably to its peers. Its stock trades at attractive multiples compared to historical averages and peer groups. The company is seen as benefiting significantly from stabilized macro conditions, which are more conducive to its transformational sales approach. Despite competition, Zscaler's innovative leadership and strategic market positioning are expected to sustain its growth.

Analysts Targets

Analysts have set varied price targets for Zscaler, reflecting their confidence in the company's prospects. Here are some of the most recent targets:

• Barclays Capital Inc. set a price target of $210.00 (November 28, 2023).
• Wolfe Research raised the price target to $205.00 (November 28, 2023).
• J.P. Morgan Securities LLC set a price target of $200.00 (November 28, 2023).
• JMP Securities set a price target of $225.00 (November 28, 2023).
• Evercore ISI adjusted the price target to $215.00 (November 28, 2023).
• BTIG, LLC set a price target of $229.00 (November 28, 2023).

Bear Case

Is Zscaler's growth plateauing?

Some analysts express concerns that Zscaler's unchanged FY24 billings guidance could signal a plateau in growth or overly conservative forecasting. The market's reaction to high expectations not being surpassed could lead to short-term stock volatility. Increased capital expenditures (capex) are expected to impact FCF margins in the short term, and there is a noted slight decrease in net retention rates due to macroeconomic factors, which could indicate challenges in expanding existing customer spend.

Will macro challenges impede Zscaler's performance?

Macroeconomic challenges, such as increased deal scrutiny and potential economic slowdown, could impact Zscaler's credit quality and billings growth. The company's guidance conservatism due to internal changes in the sales organization and macro challenges may affect its ability to meet investor expectations in the short term.

Bull Case

Can Zscaler maintain its strong market position?

Will Zscaler's innovation lead to sustained growth?

Zscaler's innovation in product offerings, with a focus on zero trust security platforms and federal business, is expected to drive sustained growth. The company's strong federal quarter performance and large deal momentum, along with prudent guidance, suggest conservative estimates that could lead to future beats. The significant growth in the federal business segment and record levels of pipeline generation indicate potential future growth.

SWOT Analysis

Strengths:

• Leading position in the SASE market.
• Strong billings and revenue growth.
• Diverse and innovative product offerings.
• Experienced management team.

Weaknesses:

• Potential plateau in growth as indicated by unchanged billings guidance.
• Slight decrease in net retention rate.
• Increased capex impacting short-term FCF margins.

Opportunities:

• Expanding TAM for cybersecurity solutions.
• Growing demand for zero trust security platforms.
• Potential for increased profitability and market share.

Threats:

• Intensified competition in the cybersecurity sector.
• Macroeconomic challenges affecting customer spending.
• Execution risks as the company scales.

The timeframe used for this analysis spans from September to November 2023.

InvestingPro Insights

For investors seeking to make informed decisions about Zscaler, Inc. (NASDAQ:ZS), real-time data and insights from InvestingPro can provide a deeper understanding of the company's financial health and market performance. With a current Market Cap of 29.41 billion USD and a Price to Book (P/B) ratio of 36.42 as of the last twelve months leading up to Q1 2024, Zscaler's valuation reflects its strong position in the cybersecurity market.

Despite not being profitable over the last twelve months, Zscaler has shown impressive Gross Profit Margins of 77.45%, indicating effective cost management and the potential for profitability. Additionally, the company has demonstrated robust Revenue Growth of 44.58% over the same period, although it is worth noting that revenue growth has been slowing down recently.

InvestingPro Tips for Zscaler highlight the expectation of net income growth this year, with 32 analysts revising their earnings upwards for the upcoming period. These revisions suggest a positive outlook on Zscaler's financial trajectory. Furthermore, the company's liquid assets exceed short-term obligations, indicating a strong liquidity position that can support ongoing operations and investments.

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