After a yr of sturdy features, Zscaler inventory (ZS -1.28%) has confronted some challenges. However, this isn’t to say that cloud-native cybersecurity leaders are underperforming.
On the opposite, the corporate’s efficiency may be very sturdy, however development continues to be gradual. I stay optimistic about his Zscaler and his cloud safety firms, however will this nonetheless be his high purchase cybersecurity inventory in 2024 and past?
Are Zscaler’s high opponents a risk?
Let’s begin this dialogue by recognizing the modifications that Palo Alto Networks (PANW -2.19%), a number one firm within the cybersecurity business and a competitor of Zscaler, simply introduced. CEO Nikesh Arora outlined new go-to-market methods within the final quarterly replace, saying Palo Alto will proceed to supply safety services and products over the subsequent yr or so till buyer agreements with competing safety firms expire. Then he mentioned. This is a sort of worth competitors, so to talk, and can briefly scale back Palo Alto’s development fee.
Zscaler CEO Jay Chaudhry would not assume this can work. However, whereas Zscaler and Palo Alto overlap in safety merchandise, the latter works on a mix of conventional community {hardware} and new cloud-based companies. Zscaler’s companies combination all community visitors into one cloud-based service and safe entry with zero belief (repeatedly verifying a consumer’s identification, together with passwords and two-factor authentication) .
In different phrases, whereas Zscaler goes head-to-head with Palo Alto, the 2 firms can coexist and thrive given the totally different buyer wants they serve.
Either approach, Zscaler shares fell after the most recent report on the outlook for slower development. As we wrote about final yr, the financial slowdown was all the time anticipated and was not as a result of Palo Alto’s new aggressive technique within the cybersecurity market. Zscaler continues to develop, and as we develop, the tempo of enlargement will naturally decelerate. Management itself has lengthy hinted that one thing like this is able to occur.
interval
Zscaler earnings
Growth fee (YoY)
Full yr 2022
$1.091 billion
62%
Full yr 2023
$1.617 billion
48%
1st quarter of 2024
$497 million
40%
2nd quarter of 2024
$525 million
35%
Outlook for the third quarter of 2024
$534 million to $536 million
Approximately 28%
Full-year forecast for FY2024*
$2.118 billion to $2.122 billion
Approximately 31%
Data supply: Zscaler. Note: The complete 2024 fiscal yr is the 12 months ending in July 2024. YOY = year-on-year change.
However, development is development, so we won’t actually ignore Zscaler’s speedy stand up the rankings. It is a standout winner within the cybersecurity market and at present ranks as one of many largest pure-play enterprise safety software program firms, as measured by income.
Data by YCharts. TTM = trailing 12 months.
Is Zscaler the very best cybersecurity inventory?
Expansion fee apart, some buyers might not like Zscaler’s present scenario. It nonetheless has a internet loss. Based on Generally Accepted Accounting Principles (GAAP), working loss and internet loss for the prior quarter (second quarter of fiscal 2024, ending January) had been $45.5 million and $28.5 million, respectively.
Indeed, Zscaler is regularly approaching GAAP breakeven and has been producing adjusted profitability and optimistic free money circulation (FCF) for a while. Last quarter’s FCF was $101 million, with an FCF margin of 19%.
Most of the distinction between the GAAP metrics is in worker inventory compensation (SBC), together with inventory compensation to Chaudhry (in whole, the household nonetheless owns roughly 35% of the excellent inventory).
However, regardless of the excessive SBC ratio, Zscaler continues to outperform expectations in FCF per share development.
Data by YCharts.
The solely drawback is that, as of this writing, Zscaler continues to be buying and selling at a excessive premium of roughly 68x trailing 12-month FCF. This premium has remained excessive over the past yr, whilst total development continues to gradual.
Zscaler is a high participant within the cybersecurity world and can’t be ignored. However, given the excessive inventory costs and the inherent volatility of shares (which has been notably evident within the wake of current earnings releases), buyers might need to use dollar-cost averaging to construct positions over time. Need to think about. Personally, I’m content material proudly owning Palo Alto Networks, Fortinet, and CrowdStrike inventory in the intervening time.
Nicholas Rossolillo and his shoppers have positions at CrowdStrike, Fortinet, and Palo Alto Networks. The Motley Fool has positions in and recommends CrowdStrike, Fortinet, Palo Alto Networks, and Zscaler. The Motley Fool has a disclosure coverage.