A closer look at Zscaler’s outlook on Wall Street. By Investing.com

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In the rapidly evolving cybersecurity sector, Zscaler, Inc. (NASDAQ:) has been the subject of intense scrutiny on Wall Street, with varying perspectives on its future trajectory. This in-depth analysis integrates the views of multiple analysts to provide a comprehensive picture of Zscaler’s current position and potential in the markets in which it operates.

Company Overview

Zscaler is a leader in cloud-based security, providing innovative solutions designed to securely connect users, devices, and applications in distributed environments. The suite of services, including Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA), is an integral part of the Secure Access Service Edge (SASE) platform, which is becoming increasingly important as enterprises transition to cloud computing and remote work.

Market Performance and Strategy

Zscaler has seen significant growth, with analysts noting a 34% year-over-year increase in claims and a more than 90% increase in new federal annual contract value (ACV). The company’s aggressive expansion strategy and leadership in zero trust security positions it strongly within the $72 billion Total Addressable Market (TAM). With the advent of generative AI and favorable economic conditions, Zscaler’s growth trajectory is expected to continue as it targets the $5 billion annual recurring revenue (ARR) milestone.

Financial Strength and Guidance

Zscaler’s financial performance remains strong, with revenue guidance raised to the midpoint of approximately $2.095 billion, representing approximately 30% year-over-year growth. Operating profit margin exceeded expectations, and annual free cash flow (FCF) margin is expected to be in the low 20% range. The net retention rate decreased slightly due to macro issues, but is expected to stabilize. Analysts at Macquarie Equity Research expect Zscaler to achieve non-GAAP operating margins in the mid-40s over the long term, suggesting strong financial strength going forward.

Product division and innovation

Zscaler’s product innovation remains a core strength, and nearly half of its new logos in the most recent quarter came from the combined ZIA, ZPA and ZDX transactions. The company’s focus on high-priority CIO initiatives and gaining market share through Zero Trust leadership has been successful. Emerging products such as ZDX, Zscaler for Workloads, and data protection products outperform competitors and are poised for further growth in FY24. The new Risk360 solution could potentially create significant demand to meet future SEC data breach reporting requirements.

competitive landscape

Zscaler continues to be well-positioned relative to its peers, trading at attractive multiples and benefiting from stable macro conditions conducive to an innovative sales approach. Despite the competitive environment, Zscaler’s innovative leadership and strategic market positioning are expected to sustain the company’s growth to 10.8x FY2E EV/sales compared to its peers’ average EV/sales of 13.1x. The cybersecurity sector is experiencing dynamic market conditions, and the median enterprise value/revenue multiple within JMP Securities’ coverage is 13.7x CY2023E revenues, indicating strong market valuations for cybersecurity companies.

For analysts

Analysts have set a variety of price targets for Zscaler, reflecting their confidence in the company’s prospects. The most recent goals are:

– Barclays Capital Inc. has set a price target of $210.00 (November 28, 2023).

– Wolfe Research raised its price target to $205.00 (November 28, 2023).

– JP Morgan Securities LLC has set a target price of $200.00 (November 28, 2023).

– JMP Securities set a price target of $225.00 (December 15, 2023).

– Evercore ISI adjusted its price target to $215.00 (November 28, 2023).

– BTIG, LLC has set a price target of $229.00 (November 28, 2023).

– Piper Sandler sets a price target of $236.00 (December 8, 2023).

– Macquarie Equity Research upgraded Zscaler from Neutral to Outperform and raised its target price to $231.00 (as of December 12, 2023).

bare case

Is Zscaler’s growth stalling?

Some analysts have expressed concern that Zscaler’s unchanged FY24 billing guidance could indicate stagnant growth or an overly conservative forecast. Failure to exceed high expectations may result in short-term stock price volatility. Increased capital expenditures (capex) are expected to impact FCF margins in the near term, and we see a slight decline in net retention due to macroeconomic factors. This may indicate difficulty expanding existing customer spending.

Are macro issues hindering Zscaler’s performance?

Macroeconomic issues, such as increased transaction scrutiny and a potential economic slowdown, may impact Zscaler’s credit quality and claims growth. The Company’s guidance conservatism due to internal changes in its sales organization and macro challenges may impact its ability to meet investor expectations in the near term.

bull incident

Can Zscaler maintain its strong market position?

Analysts are optimistic about Zscaler’s ability to maintain a strong market position, highlighting its leadership in the SASE market and strategic appointments aimed at driving growth. Even in a difficult macro environment, a company’s high growth, profitability and predictability are considered positive indicators. The company’s experienced management team and strong platform play in network security are expected to support continued revenue growth and leadership in the SSE(LON:) market.

Will Zscaler’s innovation lead to sustainable growth?

Zscaler’s innovation in product offerings, including its zero-trust security platform and focus on federal businesses, is expected to drive continued growth. The company’s strong federal quarter performance and large transaction momentum suggest conservative estimates that could lead to future performance, along with cautious guidance. Significant growth in the federal business segment and record pipeline generation levels indicate potential future growth.

SWOT analysis

strength:

– Leading position in the SASE market.

– Strong billing and revenue growth.

– Providing diverse and innovative products.

– Experienced management team.

Weakness:

– Growth is likely to stagnate under unchanged billing guidelines.

– Net retention rate decreases slightly.

– Increased capex impacting near-term FCF margins.

opportunity:

– TAM expansion for cybersecurity solutions.

– Demand for zero trust security platforms is growing.

– Potential for increased profitability and market share.

– Positive outlook for generative AI impact and favorable economic trends.

Threat:

– Competition in the cybersecurity sector is intensifying.

– Macroeconomic issues affecting customer spending.

– As the company grows in size, execution risk arises.

The period used for this analysis is September to December 2023.

InvestingPro Insights

In the context of Zscaler (NASDAQ:ZS)’s current market dynamics and future potential, InvestingPro provides valuable insights that can further inform your investment decisions. According to InvestingPro, Zscaler’s net income is expected to increase this year, which is consistent with the positive outlook for the company’s profitability mentioned in the article. Additionally, the impressive gross profit margin reported at 77.46% for the last twelve months as of Q1 2024 highlights the efficiency with which the company manages its cost of goods sold relative to its revenue.

InvestingPro Tips suggests that while earnings growth has been slowing recently, 33 analysts have upgraded earnings estimates for the coming period, suggesting potential upside for investors to consider. The company’s strong returns over the last year (97.43% price to total return) can be seen as evidence of solid performance despite some concerns about its growth trajectory.

In terms of data, Zscaler has a market capitalization of $33.01 billion, and although the company is currently trading at a high price/book value multiple of 40.88, this may reflect investor confidence in the company’s assets and future growth prospects. Last year’s high returns suggest that Zscaler has been rewarding investors despite not paying dividends.

Investors who want to delve deeper into Zscaler’s prospects can obtain additional insights through an InvestingPro subscription. Up to 60% off is currently available through a special Cyber ​​Monday sale. If you want greater value, try using a coupon code. Research 23 Get an extra 10% off a 2-year InvestingPro+ subscription. https://www.investing.com/pro/ZS has 19 additional InvestingPro tips on Zscaler and provides comprehensive analysis for those considering investing in the company.

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