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What Sets Zscaler Apart From Its Competition?

By Brian Withers and Brian Feroldi - Apr 30, 2021 at 7:51AM

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It's one of many in the crowded cybersecurity space.

Differentiating between cybersecurity companies might be a tall task for some investors. But there's a way to separate the great companies from the mediocre ones without having to completely understand the technology behind the scenes. On a Fool Live episode, recorded on April 14, Fool contributors Brian Feroldi and Brian Withers discuss why Zscaler (ZS 2.20%) is winning in the cybersecurity space and is one stock that investors should keep an eye on.

Brian Feroldi: All right, moving on to Zscaler ticker symbol ZS. As a reminder, this is a cloud security company. They're focused on "Zero trust environment." AKA once you're inside a company's network, you have to prove over and over again that you are who you said you are with credentialing. Happens automatically behind the scenes with Zscaler's products and they've been extremely successful in this area.

The big news out of this company since they reported earnings was they actually signed an interesting integration deal with CrowdStrike, another of the fastest-growing cloud security companies. Zscaler and CrowdStrike are two of the leaders and I absolutely love that they are working together to make each other's products better. Another recent announcement was that the state of Oklahoma signed Zscaler for all of its state employees. That's a pretty big vote of confidence. They have, I think 30 to 40,000 people that are now secured on Zscaler with that one deal.

The company's quarterly results were actually really good. Yet again, they now have more than 5,000 paying customers. Pretty good considering they are focused on enterprises. Revenue grew 55% to $157 million. Billings, an indicator of future growth grew 71% to $232 million. The dollar-based net revenue retention, that's retention, a good one, that came in at 127% for the quarter. That's a stellar figure. On a GAAP basis, on bottom line continues to look ugly at $68 million; however, they also generated $18 million in free cash flow over the same time period.

Gartner also upgraded their Magic Quadrant for secure web gateways in December. Zscaler is like far and away, the leader in the category. I mean, there's like a wide, wide gap when you look at them according to Gartner. Other thing to go forward from here is just going to be the same things. Dollar-based net retention and customer growth. Can they continue to sign on new customers and existing ones to spend more?

Brian Withers: Awesome. Brian, I stayed away from cybersecurity companies. I invested in some of them early on. I didn't quite call them right. What is it about Zscaler that you like in particular?

Brian Feroldi: Results. Flat out, the company just keeps on delivering. How is this, of the 5,000 customers, they have seven of the top 10 conglomerates, eight of the top 10 insurers, eight of the top 10 chemical makers, seven of the top 10 beverage makers, six of the top 10 apparel companies, and six of the top 10 household products companies. I have a hard time telling these companies apart, but when Gartner does and you see results like this and customers are flocking in droves, that gives me confidence that the company is doing something right.

Brian Withers: Yes. Customers vote with their wallet, right?

Brian Feroldi: That's it.

Brian Feroldi owns shares of CrowdStrike Holdings, Inc. Brian Withers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc. and Zscaler. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Zscaler Stock Quote
$182.64 (2.20%) $3.93
CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
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