Pro Research: Wall Street dives into Zscaler's strategic position

Zscaler Inc . (NASDAQ:ZS ) Financial Analysis Update

Recent financial analyses from firms such as Cantor Fitzgerald, UBS, and BMO Capital Markets, alongside insightful industry overviews by JMP Securities, offer a comprehensive view of Zscaler Inc.'s standing in the cybersecurity sector. Amidst a landscape marked by resilience against budget changes, platform consolidation, and disruptive technologies, Zscaler continues to adapt to market dynamics, competitive pressures, and evolving customer needs. These insights provide a deeper understanding of Zscaler's market performance, competitive dynamics, and future prospects in a sector that's becoming increasingly influenced by AI and data protection strategies.

Company Overview

Zscaler's suite of security solutions remains at the forefront of protecting users and data across various platforms. Its strategic acquisitions and focus on Data Fabric for Security have bolstered its Data Protection segment, positioning the company to capitalize on a serviceable addressable market (SAM) estimated at $96 billion. Zscaler's commitment to transitioning customers to modern Zero Trust architecture underscores its alignment with current industry trends such as enterprise browser solutions.

Market Performance and Analyst Ratings

Zscaler's stock price has experienced volatility, with a recent price of USD 188.83. The company's market capitalization has seen an uptick to approximately USD 30.52 billion. Analysts from firms including Barclays, JMP Securities, and BMO Capital Markets have offered varied insights into Zscaler's performance, with ratings ranging from "Neutral" to "Market Outperform." UBS has adjusted its price target to USD 270.00, while Cantor Fitzgerald maintains a price target of USD 200.00, and BMO Capital Markets has a target of USD 208.00. JMP Securities has not provided specific ratings or price targets but has acknowledged Zscaler among eight companies in a resilient cybersecurity industry.

Financial Highlights

Zscaler's financial results continue to display resilience, with billings growth expected to surpass 25% in the third quarter. The company's federal business is growing, and it maintains strong free cash flow margins. Operating margins have consistently exceeded guidance, contributing to a favorable financial outlook. The estimated earnings per share (EPS) for FY1 is USD 3.00 and for FY2 is USD 3.14.

Product Segments and Customer Base

Zscaler's product segments continue to demonstrate robust performance, with nearly half of the new logos acquired from consolidated ZIA, ZPA, and ZDX deals. The company is expanding its platform with five solutions underpinning the Zscaler Zero Trust Exchange (ZTE (HK:0763 )), targeting a diverse customer base, including Global 2000 and Fortune 500 accounts.

Competitive Landscape and Market Trends

Zscaler, while contending with peers like Cloudflare (NYSE:NET ) and CrowdStrike (NASDAQ:CRWD ), maintains a strong position in SSE (LON:SSE ) technology. The demand driven by digital transformation, hybrid work environments, and the emergence of enterprise browser solutions as a disruptive technology, provides Zscaler with a competitive edge. The company is recognized as a leader in innovation within the Zero Trust/SASE, Cloud Security, CXO/Business Insights, and Data Protection markets.

Regulatory Environment

Zscaler's Risk360 solution aligns with new SEC data breach reporting requirements, potentially driving further demand for its services. The company's strategic alignment with regulatory trends and compliance requirements could enhance its appeal to organizations looking to strengthen their security posture amid evolving data protection strategies.

Management and Strategy

CEO Jay Chaudhry and Chief Revenue Officer Mike Rich are at the helm of Zscaler's strategic initiatives. The company's new go-to-market strategies and transformation of its sales approach into an account-centric culture aim to tap into significant market potential. Management's prudent guidance and conservative forecasting continue to garner analyst praise.

Potential Impacts of External Factors

Zscaler's performance is influenced by external factors such as macroeconomic challenges and market expectations. Despite short-term volatility and a recent stock pullback, analysts remain optimistic about its long-term potential due to the broader focus on digital security and the shift to cloud architectures, as well as the Russell 3000's positive performance (up ~15% YTD).

Upcoming Product Launches

Zscaler's track record of innovation suggests that new offerings are on the horizon. The company's focus on expanding its product portfolio and addressing emerging security challenges will be key to sustaining growth. An upcoming earnings report is scheduled for the period between 09/02 and 09/06, which may provide further insights into the company's product roadmap and its response to industry trends such as AI and enterprise browser solutions.

Stock Performance Comparison

Zscaler's stock performance continues to be compared to indices such as the iShares Expanded Tech-Software Sector ETF (IGV) and the S&P 500. Despite individual stock movements being unpredictable, Zscaler's overall trajectory is monitored closely by analysts who note its attractive multiples compared to historical averages and peer groups.

Bear Case

What are the potential risks for Zscaler's growth?

Zscaler's growth could be hindered by factors such as macroeconomic headwinds, cybersecurity spending fatigue, increased competition, and challenges in overcoming customer inertia in transitioning to Zero Trust architecture. Concerns about the sustainability of high growth rates into FY25 may necessitate adjustments in market expectations to align with realistic growth trajectories.

Could Zscaler's stock face volatility?

Yes, Zscaler's stock may face short-term volatility due to market reactions to high expectations not being surpassed. Despite meeting optimistic scenarios for billings, the stock has experienced downward pressure, indicating that investor expectations may not align with the company's guidance.

Bull Case

Is Zscaler well-positioned for future growth?

Zscaler appears well-positioned for future growth, with strong demand indicators and a leadership position in zero trust security. Analysts are confident in the company's prospects, citing its ability to capture market share and the high priority of CIO initiatives as positive signs.

What factors could drive Zscaler's stock higher?

Several factors could propel Zscaler's stock higher, including continued strong demand for its security solutions, conservative guidance that leaves room for future beats, and the potential upside in free cash flow. The company's strategic initiatives and product innovation are also likely to contribute to its upward trajectory.

SWOT Analysis

Strengths:

- Leadership in SSE and ZTNA.

- Strong financial performance with robust billings and revenue growth.

- Diverse and expanding customer base.

- Strategic alignment with regulatory trends and compliance requirements.

Weaknesses:

- Short-term stock volatility due to market expectations.

- Possible need for adjustment in FY25 billings growth consensus.

Opportunities:

- Increased security spending and regulatory changes.

- Potential for new product launches and market expansion.

Threats:

- Intense competition in the cybersecurity sector.

- Macroeconomic challenges that may affect IT spending.

Analysts Targets

- Barclays Capital Inc.: Overweight, $210.00 price target (June 26, 2024).

- JMP Securities: Market Outperform, $270.00 price target (June 17, 2024).

- UBS Securities LLC: Buy, $270.00 price target (May 29, 2024).

- BMO Capital Markets Corp.: Outperform, $208.00 price target (May 31, 2024).

- Cantor Fitzgerald: Neutral, $200.00 price target (June 13, 2024).

The timeframe used for this analysis spans from January to June 2024.

InvestingPro Insights

In light of the comprehensive financial analysis of Zscaler Inc., it's crucial to consider some real-time metrics and InvestingPro Tips that could influence the investor's outlook on the company. Zscaler, known for its innovative cybersecurity solutions, shows a promising trajectory despite not having turned a profit over the last twelve months. Here are some insights that could provide additional context to the analysis:

InvestingPro Data indicates that Zscaler holds a market capitalization of $26.34 billion, which reflects its substantial presence in the cybersecurity market. However, the P/E ratio stands at a negative -447.67, underscoring the market's expectations of future growth rather than current profitability. The company's gross profit margin is impressive at 78.08%, demonstrating its ability to maintain a high level of operational efficiency.

InvestingPro Tips suggest that Zscaler's net income is expected to grow this year, which aligns with the positive sentiment from analysts who foresee a strong demand for the company's security solutions. Moreover, Zscaler's balance sheet is robust, holding more cash than debt, which provides financial flexibility and resilience in a dynamic market. It's also worth noting that while the company does not pay a dividend, it has shown strong returns over the last five years, indicating a potential for capital appreciation.

For investors seeking a deeper dive into Zscaler's financial health and future prospects, InvestingPro offers additional tips. Currently, there are 32 more InvestingPro Tips available, which provide a comprehensive analysis of the company's financials, market performance, and potential investment risks and rewards.

These insights and more can be found by visiting https://www.investing.com/pro/ZS, which may help investors make more informed decisions regarding Zscaler Inc.

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Source: Investing.com