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In the rapidly evolving landscape of cybersecurity, Zscaler, Inc. (NASDAQ:) stands out as a prominent player, particularly in the Secure Access Service Edge (SASE) market. This deep-dive analysis will explore the company’s market performance, product segments, competitive landscape, and other critical factors that shape its future outlook.
Company Overview
Zscaler is recognized for its SASE platform, which is expected to grow significantly and could match the size of the traditional network security market by CY26. The company has a first-mover and scale advantage in this market. Its growing platform story with ZDX, Zscaler for Workloads, and data protection offerings are outpacing competitors. The demand for zero trust security platforms, notably within US federal agencies, is on the rise.
Market Performance and Trends
The company has seen notable growth in the US federal vertical, including an eight-figure deal in September. Its products like ZDX and Zscaler for Workloads are gaining traction faster than its successful ZPA product post-pandemic. Analysts have raised FY24 billings estimates to the high end of guidance and introduced FY26 estimates with a forecast of 20% growth in billings. EBIT and FCF margin expansion is expected in FY25 and FY26.
Competitive Landscape
The cybersecurity industry, particularly IoT/OT environments, has been a topic of interest, with companies in the sector outperforming the Russell 3000 Index, which was up ~11% YTD. Zscaler’s strong position in SASE and expansion into new product areas and verticals has given it an edge over competitors. However, there are potential impacts of rising interest rates on interest coverage and a possible economic slowdown impacting credit quality to consider.
Financial Health
Zscaler has demonstrated solid financials, with FY24 billings estimates raised and the introduction of FY26 estimates anchored on FCF projections. The company’s stock has seen fluctuations, but specific numbers like the 52-week range are omitted due to their potential to become quickly outdated. Instead, the focus remains on the company’s long-term financial health and growth potential.
Analyst Outlooks and Projections
Analysts are generally bullish on Zscaler, with upgrades to ratings and price targets reflecting confidence in the company’s market position and growth potential. The company’s products are gaining traction and are expected to contribute to its revenue and margin expansion. The bullish case is supported by Zscaler’s strong positioning in a rapidly expanding market segment, positive adjustments to future billing estimates, and introduction of new financial year projections.
Bear Case
Is Zscaler’s growth sustainable in the competitive SASE market?
While Zscaler has established a strong foothold in the SASE market, there are concerns about sustaining high growth rates amidst increasing competition. The company must navigate the challenges of maintaining its first-mover advantage while continuously innovating to stay ahead of rivals.
Can macroeconomic factors impact Zscaler’s performance?
With potential headwinds such as rising interest rates and economic slowdown, there’s a possibility that Zscaler’s growth could be impacted. Tightened budgets and increased deal scrutiny could affect the company’s ability to close large deals, a critical component of its revenue stream.
Bull Case
Will Zscaler’s expansion into new products drive future growth?
Zscaler’s expansion into new products and verticals, including its data protection offerings and growing federal business, positions the company for future growth. With a broadening product portfolio, Zscaler can capture more market share and diversify its revenue sources.
How will Zscaler’s market leadership influence its stock performance?
As a market leader in SASE, Zscaler’s strong position provides a competitive advantage that can translate into stock performance. With high confidence in long-term market growth and margin expansion, the company’s leadership status could continue to attract investor interest.
SWOT Analysis
Strengths:
– Market leadership in SASE.
– Diverse and expanding product portfolio.
– Strong federal business growth.
Weaknesses:
– Potential competition in the SASE space.
– Execution risks associated with high growth rates.
Opportunities:
– Growing demand for zero trust security platforms.
– Expansion into new product areas and verticals.
Threats:
– Rising interest rates and economic slowdown.
– Increased scrutiny and elongated sales cycles.
Analysts Targets
– Barclays Capital Inc. on Monday, October 09, 2023: Overweight with a price target of $190.
– JMP Securities on Tuesday, October 24, 2023: Market Outperform with a price target of $225.
– Jefferies on Thursday, October 19, 2023: Buy with a price target of $225.
– BMO Capital Markets on Wednesday, September 06, 2023: Outperform with a price target of $180.
– BTIG on Wednesday, September 06, 2023: Buy with a price target of $191.
– Deutsche Bank on Wednesday, September 06, 2023: Buy with a price target of $185.
– Evercore ISI on Wednesday, September 06, 2023: Outperform with a price target of $200.
– BofA Global Research on Wednesday, September 06, 2023: BUY with a price target of $180.
– Cantor Fitzgerald on Wednesday, September 06, 2023: Neutral with a price target of $170.
– RBC Capital Markets on Wednesday, September 06, 2023: Outperform with a price target of $185.
– BMO Capital Markets on Wednesday, October 18, 2023: Outperform with a price target of $195.
– Barclays on Thursday, November 16, 2023: Overweight with a price target of $210.
– BTIG on Tuesday, November 28, 2023: Buy with a price target of $229.
– Evercore ISI on Tuesday, November 28, 2023: Outperform with a price target of $215.
– JMP Securities on Tuesday, November 28, 2023: Market Outperform with a price target of $225.
– J.P. Morgan on Tuesday, November 28, 2023: Neutral with a price target of $200.
– Wolfe on Tuesday, November 28, 2023: Outperform with a price target of $205.
– Barclays on Tuesday, November 28, 2023: Overweight with a price target of $210.
This analysis spans from September to November 2023.
InvestingPro Insights
In the context of Zscaler, Inc.’s (NASDAQ:ZS) strategic moves within the cybersecurity sector, current financial metrics and market performance provide additional insight into the company’s valuation and growth potential. According to InvestingPro data, Zscaler is currently valued at a market cap of approximately $28.75 billion, with a high Price / Book ratio of 35.61 as of the last twelve months ending Q1 2024. This valuation reflects the company’s strong market position, underscored by a significant gross profit margin of 77.45% during the same period, which aligns with the company’s reputation for impressive gross profit margins, as noted in an InvestingPro Tip.
While the company’s revenue growth has been robust at 44.58% over the last twelve months ending Q1 2024, analysts have observed a recent slowdown in this growth trajectory, another critical point from InvestingPro Tips. Nonetheless, the company’s liquid assets surpass short-term obligations, suggesting financial resilience and operational stability. Investors should note that Zscaler has been trading near its 52-week high, with a price 98.38% of the peak, indicating strong market confidence.
For those looking to delve deeper into Zscaler’s investment profile, InvestingPro offers additional insights. There are 15 more InvestingPro Tips available, which can guide investors in understanding the company’s financial nuances and market dynamics. Subscribers can enhance their research with these comprehensive tips, especially now with the special Cyber Monday sale offering up to 55% off. Plus, use the coupon code research23 to receive an additional 10% off a 2-year InvestingPro+ subscription, further enriching the investment decision-making process.
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