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Is Zscaler the Best Cybersecurity Stock to Buy?

By Matthew Frankel, CFP® - Updated Jun 25, 2021 at 2:20PM

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There are some great companies in the cybersecurity space -- how does ZScaler stack up?

Cybersecurity is more important than ever, and there are some excellent choices when it comes to investment opportunities. In this Fool Live video clip, recorded on May 28, Fool.com contributor Matt Frankel, CFP, along with chief growth officer Anand Chokkavelu and analyst Tim Beyers, discuss why Zscaler (ZS 2.13%) could be an especially interesting stock to put on your radar.

Matt Frankel: When I was doing some research for this, this is actually the most popular of these among Fool services -- it was recommended by 11 different Fool services. The next is nine, so it's pretty popular. This is another cloud-based security company, which like I said, I'm sure that Tim can fill in whatever I miss here. But their mission is to extend protection beyond their client's physical footprints. They have 150 data centers or so worldwide, they claim to handle more than 150 billion online transactions per day and prevent 7 billion security incidents. They've been very successful among larger enterprises. They have over 5,000 customers, and 500 of them are among the Forbes Global 2000. They've also done a great job of diversifying their business internationally, about half of their revenue is international. They've been growing very, very fast; over 50% revenue growth year-over-year in the past couple of quarters, 122% net dollar retention rate, which I mentioned with Cloudflare, that that's one of their big strengths, is they're upselling their clients. Zscaler's upselling number is even more impressive. They estimate their current addressable market to be about 335 million potential users, which would put its annual revenue at about $72 billion of annual revenue opportunity. That's just including what they do today, they say there are some adjacent opportunities they can pursue, such as Internet-of-Things applications is one that they've mentioned, business-to-business applications, that market could get even bigger over time. Very engaged co-founder CEO Jay Chaudhry, still in charge of the business. He got a 20% stake directly, plus owns another 20% through family trusts, very highly invested in this. It's not a cheap stock, about 40 times sales, but when you look at these numbers, it looks well justified in my opinion.

Tim Beyers: Yeah, I agree with you. The only thing to add there is Zscaler specializes in what's called zero trust. Zero trust is, Anand, I could see you, known you for years, of course.

Anand Chokkavelu: You don't trust me. I got you.

Beyers: I should let you through the door, but should I let you through the next door? That's the whole thing, so every time I'm going to take you through. I remember this back when I was a contractor, I would come to Fool HQ because I didn't have a key card, and of course, we have security at all of the buildings. Somebody like Anand would have to come in and key me in and then key me into the next door and the next door and the next door. Every time you had to be authenticated through that key card, that's zero trust. Zero trust is I get on the internet and I show up at the digital door and it says, "Are you, Anand?" "Yes." "Show me your credentials." Yes, I'm Anand. Okay got it, go ahead, get to the next door. "Hey, are you Anand?" "Yes, here are my credentials." Then through the next door, and the next door and the next door. We don't trust you, we immediately forget you are who you say you are, we don't just give you unlimited access to all of the digital network through just one entry point. It's authenticating over and over and over again. Part of the way Zscaler does this, they go from the device outward into the cloud. It's a really smart way that they develop it. There is an agent, there's a little bit of software on your computer. You have the Zscaler software on a computer, on your device, whatever it is you are using, and that helps authenticate that you are who you say you are. Zscaler has built out its own infrastructure, all its own data centers, what they call these virtual routers, where Zscaler is a constant companion with you as you're traveling around the virtual network or the internet and essentially orchestrating this constant level of authentication to protect the companies that it's serving. It's an interesting model and it is 100% cloud-first. Remember what we said about FireEye, I actually think of Zscaler as the opposite of FireEye. This is the one that I think is cloud-native, cloud-first, it's built to scale out entirely on a cloud basis and they're not trying to do any kind of on-premise stuff, they are just like, "We're all in on cloud-first, cloud-native security," and they've done pretty well with it.

Anand Chokkavelu, CFA has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. Tim Beyers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zscaler. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Zscaler Stock Quote
Zscaler
ZS
$184.25 (2.13%) $3.84
Mandiant, Inc. Stock Quote
Mandiant, Inc.
MNDT
$22.87 (-0.09%) $0.02
Cloudflare, Inc. Stock Quote
Cloudflare, Inc.
NET
$79.56 (1.21%) $0.95

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