Wall Street deep dive into Zscaler’s prospects By Investing.com
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<p><em>Explore Wall Street’s expert insights with this ProResearch article, which will exclusively be available to </em><em>InvestingPro</em><em> subscribers soon. Enhance your investment strategy with ProPicks, our newest product featuring strategies that have outperformed the S&P 500 by up to 700%. This New Year, enjoy up to 50% off, plus an extra 10% off a 2-year subscription with the code </em><strong><em>research23</em></strong><em>, reserved for the first 500 quick subscribers. To ensure ongoing access to valuable content like this, step up your investment game with InvestingPro.</em></p>
<p>In the rapidly evolving sector of cybersecurity, Zscaler, Inc. (NASDAQ:) has been a subject of intense scrutiny from Wall Street, with varied perspectives on its future trajectory. This deep-dive analysis consolidates views from several analysts to provide a comprehensive picture of Zscaler’s current standing and potential in the markets it operates.</p>
<h2>Company Overview</h2>
<p>Zscaler is a leader in cloud-based security, offering innovative solutions designed to securely connect users, devices, and applications in a distributed environment. Its suite of services, including Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA), are integral to its Secure Access Service Edge (SASE) platform, which has become increasingly crucial as enterprises transition to cloud computing and remote work.</p>
<h2>Market Performance and Strategy</h2>
<p>Zscaler has demonstrated substantial growth, with analysts noting a 34% year-over-year increase in billings and federal new Annual Contract Value (ACV) growth over 90%. The company’s aggressive expansion strategy and leadership in zero trust security place it in a strong position within a $72 billion Total Addressable Market (TAM). With the advent of generative AI and favorable economic conditions, Zscaler’s growth trajectory is expected to continue, aiming for a $5 billion Annual Recurring Revenue (ARR) milestone.</p>
<h2>Financial Health and Guidance</h2>
<p>Zscaler’s financial performance remains robust, with revenue guidance raised to a midpoint of approximately $2,095 million, indicating year-over-year growth of about 30%. Operating margins have surpassed expectations, and free cash flow (FCF) margins are projected in the low-20% range for the full year. The company’s net retention rate has experienced a slight dip due to macro challenges but is anticipated to stabilize. Analysts from Macquarie Equity Research expect Zscaler to achieve mid-40s % non-GAAP operating margins in the long term, signaling strong financial health ahead.</p>
<h2>Product Segments and Innovation</h2>
<p>Zscaler’s product innovation remains a key strength, with nearly half of new logos in a recent quarter originating from consolidated ZIA, ZPA, and ZDX deals. The company’s focus on high-priority CIO initiatives and market share gains through zero trust leadership has been successful. Emerging products like ZDX, Zscaler for Workloads, and data protection offerings are outperforming competitors and are poised for further growth in FY24. The new Risk360 solution aligns with upcoming SEC data breach reporting requirements, potentially driving significant demand.</p>
<h2>Competitive Landscape</h2>
<p>Zscaler continues to be favorably positioned against its peers, trading at attractive multiples and benefiting from stabilized macro conditions conducive to its transformational sales approach. Despite a competitive landscape, Zscaler’s innovative leadership and strategic market positioning are expected to sustain its growth, with the company trading at 10.8x FY2E EV/sales compared to peers at an average of 13.1x EV/sales. The cybersecurity sector is experiencing dynamic market conditions, and the median enterprise value/revenue multiple within JMP Securities’ coverage universe is 13.7x CY2023E revenue, indicating a strong market valuation for cybersecurity firms.</p>
<h2>Analyst Targets</h2>
<p>Analysts have set varied price targets for Zscaler, reflecting their confidence in the company’s prospects. Here are some of the most recent targets:</p>
<p>– Barclays Capital Inc. set a price target of $210.00 (November 28, 2023).</p>
<p>– Wolfe Research raised the price target to $205.00 (November 28, 2023).</p>
<p>– J.P. Morgan Securities LLC set a price target of $200.00 (November 28, 2023).</p>
<p>– JMP Securities set a price target of $225.00 (December 15, 2023).</p>
<p>– Evercore ISI adjusted the price target to $215.00 (November 28, 2023).</p>
<p>– BTIG, LLC set a price target of $229.00 (November 28, 2023).</p>
<p>– Piper Sandler set a price target of $236.00 (December 08, 2023).</p>
<p>– Macquarie Equity Research upgraded Zscaler to Outperform from Neutral and raised the target price to $231.00 (December 12, 2023).</p>
<h2>Bear Case</h2>
<h3>Is Zscaler’s growth plateauing?</h3>
<p>Some analysts express concerns that Zscaler’s unchanged FY24 billings guidance could signal a plateau in growth or overly conservative forecasting. High expectations not being surpassed could lead to short-term stock volatility. Increased capital expenditures (capex) are expected to impact FCF margins in the short term, and there is a noted slight decrease in net retention rates due to macroeconomic factors, which could indicate challenges in expanding existing customer spend.</p>
<h3>Will macro challenges impede Zscaler’s performance?</h3>
<p>Macroeconomic challenges, such as increased deal scrutiny and potential economic slowdown, could impact Zscaler’s credit quality and billings growth. The company’s guidance conservatism due to internal changes in the sales organization and macro challenges may affect its ability to meet investor expectations in the short term.</p>
<h2>Bull Case</h2>
<h3>Can Zscaler maintain its strong market position?</h3>
<p>Analysts are bullish on Zscaler’s ability to maintain its strong market position, highlighting its leadership in the SASE market and its strategic appointments aimed at driving growth. The company’s high level of growth, profitability, and predictability, even in a challenging macro environment, are seen as positive indicators. The firm’s experienced management team and robust platform play in network security are expected to support continued revenue growth and leadership in the SSE (LON:) market.</p>
<h3>Will Zscaler’s innovation lead to sustained growth?</h3>
<p>Zscaler’s innovation in product offerings, with a focus on zero trust security platforms and federal business, is expected to drive sustained growth. The company’s strong federal quarter performance and large deal momentum, along with prudent guidance, suggest conservative estimates that could lead to future beats. The significant growth in the federal business segment and record levels of pipeline generation indicate potential future growth.</p>
<h2>SWOT Analysis</h2>
<p>Strengths:</p>
<p>– Leading position in the SASE market.</p>
<p>– Strong billings and revenue growth.</p>
<p>– Diverse and innovative product offerings.</p>
<p>– Experienced management team.</p>
<p>Weaknesses:</p>
<p>– Potential plateau in growth as indicated by unchanged billings guidance.</p>
<p>– Slight decrease in net retention rate.</p>
<p>– Increased capex impacting short-term FCF margins.</p>
<p>Opportunities:</p>
<p>– Expanding TAM for cybersecurity solutions.</p>
<p>– Growing demand for zero trust security platforms.</p>
<p>– Potential for increased profitability and market share.</p>
<p>– Positive outlook from generative AI impact and favorable economic trends.</p>
<p>Threats:</p>
<p>– Intensified competition in the cybersecurity sector.</p>
<p>– Macroeconomic challenges affecting customer spending.</p>
<p>– Execution risks as the company scales.</p>
<p>The timeframe used for this analysis spans from September to December 2023.</p>
<h2>InvestingPro Insights</h2>
<p>As investors and analysts continue to assess the potential of Zscaler, Inc. (NASDAQ:ZS), real-time data and insights from InvestingPro offer additional depth to the narrative. Zscaler’s market capitalization stands at a solid $32.44 billion, reflecting the company’s significant presence in the cybersecurity space. Despite a negative P/E ratio of -193.78, indicating that the company is not currently profitable, there are positive signals in other areas of its financial performance. </p>
<p>With a gross profit margin of 77.46% in the last twelve months as of Q1 2024, Zscaler demonstrates an ability to maintain impressive profitability on its services, even as it scales up operations. This aligns with the InvestingPro Tip that highlights Zscaler’s “impressive gross profit margins.” Additionally, the company has shown a robust revenue growth of 44.58% in the same period, although it’s worth noting that an InvestingPro Tip points out that “revenue growth has been slowing down recently,” which could be a point of consideration for investors looking at the long-term trajectory.</p>
<p>Another key InvestingPro Tip to consider is that “33 analysts have revised their earnings upwards for the upcoming period,” suggesting a consensus of optimism regarding Zscaler’s financial outlook. This could be a compelling point for those considering the company’s future earnings potential. For investors seeking more detailed analysis, there are 19 additional InvestingPro Tips available, offering a comprehensive look at various aspects of Zscaler’s financial and market performance.</p>
<p>Investors interested in taking a deeper dive into Zscaler’s financials can take advantage of the special Cyber Monday sale on InvestingPro subscriptions, now with up to 60% off. Plus, use coupon code <b>research23</b> to get an additional 10% off a 2-year InvestingPro+ subscription. This offer is a timely opportunity to access valuable insights that could inform investment decisions in the dynamic cybersecurity sector.</p>
<p><em>This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.</em></p>
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