Zscaler Ltd

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There are few industries right now, and moving forward, that will hold as much importance over global business than cyber security. As more of our data and information make their way to the cloud, there is an increasing need for malicious threat detection to be present for any enterprise that does business online. Zscaler (NASDAQ:ZS) is an American cyber security company based out of Silicon Valley that was founded in 2007 by Jay Chaudhry, an entrepreneur who previously founded companies like AirDefense, CipherTrust, CoreHarbor, and SecureIT. Zscaler operates over 150 global data centers with over 4,500 customers of which more than 450 are customers of over $20,000. Learn more

Like with most stocks, Zscaler was beaten down back in March of 2020 at the start of the COVID-19 pandemic. Since then, it has been a completely different story. On April 1, 2020, Zscaler was valued at around $67.80 per share. Today, the stock trades for nearly $195.00 per share, good for 190% returns over the past 14 months. Zscaler now has a market cap of over $26 billion USD, and as with most high growth companies, trades at some pretty inflated valuations. It has a lot of steep competition in the field though, so how does Zscaler rank as a long-term investment?

The Bullish Case: The case for Zscaler being a necessary company moving forward is simple: according to its 2021 analyst presentation, Zscaler deals with over 7 billion security incidents and policy violations per day. This figure only stands to rise as we move into a cloud-based future for enterprises around the world. Its 150 billion transactions per day is ten times more than what Google processes so the scale that Zscaler is growing is truly apparent. Combine this with the fact that Zscaler’s financial picture is looking strong for a high growth company, exhibiting a 64% year over year growth in billings, a 52% year over year growth in revenues, and a very impressive 122% dollar based net retention rate, which means customers on average are spending 22% more each year. Zscaler is also undergoing an aggressive international expansion plan that will see it grow its market in Asia and Latin America over the next few years. Zscaler does business with some of the top names in the tech industry including Microsoft, Amazon, Google, Zoom, Crowdstrike, Samsung, Okta, Oracle, and Splunk. With partners like this, Zscaler has a bright future as one of the leaders in the cybersecurity space.

The Bearish Case: The downside to all high growth stocks is of course its current valuations. Zscaler trades at 350 times forward looking price to earnings and 44 times price to sales. It’s not a cheap stock right now and it is currently trading just off the all-time high prices. Sure Zscaler can grow into its price, but exponential growth may be somewhat limited right now. Zscaler also has a lot of competition from legacy brands like McAfee, Kaspersky, and Cisco, but actually works alongside other cyber securities brands like Crowdstrike and Cloudflare, rather than competing against them.

Final Verdict on Zscaler: Zscaler is a necessary business moving forward and companies like this have a long-term industry moat that will be hard for others to penetrate. The company is exhibiting tremendous year over year growth and has the very best in the tech industry as its clientele. Zscaler is also trading at high multiples so exponential growth like its performance over the past year may be slower moving forward, as the stock grows into its valuation. Still, Zscaler is going to be an industry leader for years to come, in a sector that will be of crucial importance for decades. 

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