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Should You Buy Zscaler Stock at Its All-Time High?

By Herve Blandin - Dec 10, 2020 at 9:38AM

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The cloud cybersecurity specialist posted outstanding quarterly results, but competition is intensifying.

Following better-than-expected quarterly results and raised guidance last week, Zscaler's ( ZS -2.52% ) stock price reached all-time highs. The cloud cybersecurity specialist is poised to keep growing over the long term thanks to its innovative solutions, but is now a good time to buy the stock?

Providing security

Zscaler's cybersecurity portfolio ideally addresses the increasing demand for users to securely browse the internet and access apps from anywhere. Over the last several years, enterprises have been moving some of their applications and infrastructure to the cloud to benefit from scalable resources on demand. And coronavirus-induced shelter-in-place orders accelerated the need for remote working solutions. With both these trends, traditional cybersecurity devices that protect enterprise resources hosted in a central data center are becoming insufficient.

Zscaler's solutions allow secure access to resources no matter where the user and applications are located, which exposes the company to the attractive cloud cybersecurity market that is forecast by research outfit Mordor Intelligence to grow at a compound annual growth rate of 14.4% through 2025. Founded in 2007, Zscaler benefited from a head start as it built a cloud-based security system.

A man holding a magnifying glass over a cloud and a lock

Image source: Getty Images.

Solid results

Thanks to its innovative cloud cybersecurity offering, the company has been generating strong revenue growth over the last several years. During the last quarter, revenue increased 52% year over year to $142.6 million, driven by the strength of core products ZIA (Zscaler Internet Access) and ZPA (Zscaler Private Access), which secure internet browsing and access to private applications, respectively. 

And given the strong demand for the company's offerings, management raised its full-year outlook. It expects revenue to land in the range of $608 million to $612 million during fiscal 2021, ending on July 31, which corresponds to solid year-over-year growth of 41.5% at the midpoint, compared to 42% last year.

Beyond the short term, the company should keep generating solid revenue growth thanks to cross-selling opportunities between ZIA and ZPA. In particular, its more recent ZPA solution should fuel that growth as its ability to secure remote access to private applications complements the safe browsing of the internet that ZIA offers. As an illustration of ZPA's potential, the product represented only 13% of total revenue during the most recent quarter, but CEO Jay Chaudhry said during the earnings call that ZPA accounted for approximately 30% of the company's new business.

In addition, Zscaler has been developing additional tools to increase its addressable market and fuel its growth. For instance, its new ZDX (Zscaler Digital Experience) solution helps enterprises improve the experience of ZIA and ZPA users by providing end-to-end visibility to identify performance issues. 

No margin of safety

Zscaler's stock price has jumped by more than 280% since the beginning of the year as investors are optimistic about the accelerated shift to remote work and Zscaler's outstanding recent results. It is now trading at 41 times the midpoint of management's full-year revenue outlook, which indicates the market expects phenomenal results over the next several years.

However, that lofty valuation ignores the risks of intensifying competition. Indeed, several legacy cybersecurity players have been recently ramping up their efforts to secure remote-working environments.

For example, Check Point Software acquired Odo Security in September to integrate a cloud remote-working solution into its portfolio. Palo Alto Networks has developed its Prisma Access offering over the last several quarters to compete in that market. And innovative and high-growth content delivery network specialist Cloudflare announced such capabilities in October with its new platform, Cloudflare One.

Finding the winners amid such a competitive environment remains challenging and Zscaler's valuation doesn't leave much margin of safety for investors should the cloud cybersecurity specialist deliver less-than-stellar performance. 

In addition, Zscaler's path to profitability remains to be seen as the company has been spending a large portion of its revenue on sales and marketing expenses. During the last quarter, its net loss reached $55 million, compared to $17.1 million in the prior-year quarter.

Thus, investors should remain cautious despite Zscaler's recent strong results. The company seems poised to keep growing thanks to its relevant offering in the attractive cloud cybersecurity area, but the market is already pricing the tech stock for flawless execution over the next several years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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