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Overview
Zscaler, is a cloud security company that provides internet security, web security, and software-as-a-service (SaaS) solutions. Its primary product is the Zscaler Zero Trust Exchange platform, which helps organizations secure access to applications and services regardless of where users are located or what device they are using. The platform operates on a Zero Trust model, ensuring that only authenticated and authorized users can access applications and data. Zscaler's services are designed to replace traditional network security models with a cloud-based approach, making it a key player in the cloud security sector.
Recent Performance
Overall, Zscaler delivered very strong financial and operational performance in the quarter, exceeding their own guidance across multiple metrics.
As of August 9, 2024, Zscaler, Inc. (ZS) has a YTD total return of -17.90%. The stock is trading at $174.36, which is 28.54% above its 52-week low of $135.65 and -31.6% below its 52-week high of $254.93.
Revenue grew 32% year-over-year to $553 million, billings grew 30% year-over-year to $628 million, and they had 523 customers with over $1 million in ARR, up 31% year-over-year. Operating profit nearly doubled year-over-year, and operating margin reached a record 22%.
Moat Analysis
Zscaler has a solid competitive advantage driven by network effects, high switching costs, and significant intangible assets. However, the cybersecurity industry is highly competitive, and while Zscaler is well-positioned, the moat is not yet wide due to potential competition from larger players and rapidly evolving technology.
Network Effect: Zscaler benefits from a network effect as more organizations adopt its platform. The more users and companies that use Zscaler's services, the more data the company can analyze to improve its threat detection and prevention capabilities. This creates a reinforcing loop where increased usage enhances the product's effectiveness, attracting even more customers.
Switching Costs: Zscaler's platform is deeply integrated into the IT infrastructure of its customers, making it challenging and costly to switch to another provider. Additionally, the company's focus on Zero Trust architecture is central to many of its customers' security strategies, increasing their reliance on Zscaler.
Intangible Assets: Zscaler holds a strong brand and reputation in the cybersecurity industry, particularly in cloud security. The company is also recognized for its innovation and leadership in the Zero Trust architecture, a growing segment in the cybersecurity market. Its patented technologies and ongoing investment in research and development further enhance its competitive position.
Cost Advantage: While Zscaler is not necessarily a low-cost provider, its cloud-native architecture allows it to scale more efficiently than traditional hardware-based security solutions. This enables the company to offer a more cost-effective solution to its customers, especially as they move away from legacy systems.
Financial Analysis
Revenue Growth: Zscaler has demonstrated strong revenue growth, with year-over-year increases driven by the expanding adoption of its Zero Trust platform. The company has been able to maintain high growth rates as organizations continue to prioritize cloud security.
Profitability: Zscaler is not yet consistently profitable on a GAAP basis due to significant investments in sales, marketing, and research and development. However, the company is showing improvement in operating margins as it scales.
Balance Sheet: Zscaler has a strong balance sheet with a significant amount of cash and equivalents. This financial strength allows the company to invest in growth opportunities and weather any short-term economic uncertainties.
Cash Flow: Zscaler has been generating positive operating cash flow, which is a positive indicator of its financial health and ability to sustain operations without relying on external financing.
Risk To Consider
Intense Competition: The cybersecurity space is highly competitive, with major players like Palo Alto Networks, Cisco, and newer entrants all vying for market share.
Technological Changes: Rapid changes in technology and the evolving nature of cybersecurity threats mean that Zscaler must continually innovate to stay ahead.
Valuation Risk: Given the high multiples at which Zscaler trades, any slowdown in growth or failure to meet market expectations could lead to significant stock price volatility.
Outlook
Zscaler expects continued strong demand for its Zero Trust Exchange platform as enterprises look to adopt it for better cyber and data protection.
The company is rapidly expanding its platform with organic innovations as well as strategic acquisitions, which are increasing its market opportunity.
Zscaler is focused on investing in innovation and strengthening its go-to-market organization to capture its large and growing market opportunity.
The demand for cloud security solutions is expected to continue growing, and Zscaler is well-positioned to capitalize on this trend. However, you should be cautious of paying too high a premium for future growth.
Zscaler faces competition from both traditional security companies and other cloud-native firms. The company's ability to maintain its growth and competitive edge will be crucial in justifying its current valuation.
