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Why Zscaler Is A Great Investment Amid Rising Cybersecurity Threats

By Anthony Di Pizio – Updated Jun 14, 2021 at 9:26AM

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The cloud security provider continues to expand its products and services, potentially boosting revenues that are already growing rapidly.

Cybersecurity has dominated the headlines recently, as foreign and domestic hackers target critical U.S. industries and infrastructure seeking ransom payments. Damage caused by cybercrime is expected to cost up to $6 trillion globally in 2021 according to Cybersecurity Ventures, so companies can't afford to skimp on protection. As more networks migrate to the cloud, over 450 of the Forbes global 2,000 companies have sought assistance from Zscaler (ZS -1.71%)

The company offers a wide range of products and services to make cloud operations safe and secure. Although it's still operating at a loss, the business is scaling quickly, gearing its additional investments toward bolstering its presence in ransomware. Cybercrime is only growing more dangerous, so Zscaler shares might be a good place for your money going forward. 

Two people viewing a tablet in front of supercomputers.

Image source: Getty Images.

Security from anywhere

Zscaler takes a cloud-based approach to cybersecurity. This is designed to protect company networks and assets, even when employees are accessing them remotely, for example. Put simply, Zscaler acts as a filter between a device and the internet to protect against cyber threats on the way to accessing assets online. Since it is cloud-based, it doesn't require any additional hardware or software installed on devices, or on-premises. 

The company also offers a private access solution (ZPA), designed to build a secure perimeter around an entity's applications. Since connectivity is increasingly moving away from company networks and onto the internet, it's important to implement security where those connections happen. Zscaler Private Access works on zero-trust network access, where every user needs to adhere to strict identification requirements -- whether they're a part of the network or not. This makes the applications behind the protective layer virtually invisible to outsiders, because they're never directly exposed to the internet. 

Zscaler is also an authorized networking partner for Microsoft Office 365. In an age where collaborative live documents have changed the way we work, it's as important as ever to focus on protecting the data contained in those shared files. Over 4,500 companies have used Zscaler to deploy Office 365.

Fast-growing revenue

For the fiscal 2021 third quarter, which was just announced, Zscaler generated $176.4 million in revenue, up 60% year over year. However, the company's net loss more than tripled to $58.4 million -- attributable to more aggressive spending on marketing, research and development, and interest payments on debt. The loss was a reduction on a sequential basis, though. 

Zscaler is a software-as-a-service company with high gross margins, so in theory it has the flexibility to run high costs to grow its business, and cut them back in the future to generate net profits. 

Metric

Fiscal Q4 2020

Fiscal Q1 2021

Fiscal Q2 2021

Fiscal Q3 2021

Revenue (millions)

$125.9

$142.6

$157.0

$176.4

Deferred Revenue* (millions)

$369.8

$371.9

$446.8

$495.4

GAAP Net Loss

$49.5

$55.0

$67.5

$58.4

DATA SOURCE: COMPANY FILINGS. *DEFERRED REVENUE RELATES TO ADVANCED PAYMENTS FOR PRODUCTS OR SERVICES TO BE PERFORMED IN THE FUTURE. GAAP = generally accepted accounting principles.

Overall, the company is doing a good job managing its losses as revenue ramps up, even with the key acquisitions of small cloud start-ups TrustDome and Smokescreen Technologies. Zscaler will continue to invest in developing these new technologies, with the goal of integrating them into its main products and services to bolster future revenue growth. 

With $601.9 million in trailing 12-month revenue and a market capitalization of $25 billion, its revenue multiple is about 43 times. While this is extremely high -- even higher than high-flyer Tesla, for example -- at the current rate of growth, the stock could begin to look cheap within a couple of years. Not to mention, Zscaler's stock is down about 13% from its highs, and if it continues to dive, it will bring down that lofty revenue multiple even further. 

The company has a clear focus on growth instead of profitability in the short term, as it outlined in the recent Q3 earnings call. This might cause persistent losses for now, but could be key to big earnings results in the future. 

Looking forward

The global cybersecurity industry was about $162 billion in size in 2020, and is expected to grow to $418 billion by 2028 -- so Zscaler has a significant market opportunity. As cybercrime continues to cause a growing amount of damage, this estimate might even be conservative. 

However, there is a lot of competition in this space. Zscaler has some advantages, in that it's already acquired highly valuable customers that will likely be reluctant to switch providers (big companies find major systems changes burdensome). It also has a very non-invasive product that doesn't require large-scale installations across company networks or devices, which makes the user experience rather seamless. Finally, Zscaler is already recognized as the leader in this space -- so it's in a strong position to advance its business.

With over $1.4 billion in cash, equivalents, and short-term investments, Zscaler is well capitalized to continue investing in growth. Investors should watch for revenue performance in the coming quarters, to see if the company can keep up its current pace.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft, Tesla, and Zscaler. The Motley Fool has a disclosure policy.

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ZS
$165.89 (-1.71%) $-2.89

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