The expectation of rising interest rates has sparked a significant sell-off in growth stocks, and shares of Zscaler (ZS -1.49%) have fallen more than 25% from their all-time high. However, this cloud security company has several tailwinds working in its favor, and now looks like a good time to buy a few shares.
In this Backstage Pass clip, recorded on Jan. 11, Motley Fool contributor Trevor Jennewine shares his thoughts on Zscaler, focusing on the company's long-term growth prospects.
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Trevor Jennewine: Zscaler is down a little over 25% right now. This company specializes in cloud-based networking and security services. It has a zero-trust platform that essentially comprises the network of over a 150 data centers around the world. And it uses that infrastructure to replace outdated corporate network architectures. So, rather than routing all of your traffic through a central corporate hub, Zscaler allows you to first send that traffic through its platform, and that's where security policies are enforced. Then the traffic is forwarded onto the final destination. That means clients don't have to buy and maintain expensive on-site security appliances. And because Zscaler's network offers such tremendous bandwidth, and it handles more traffic, it can accelerate the speed and provide better security compared with traditional corporate networks.
What you call that, when you blend those cloud-based networking and security services, it's called a Secure Access Service Edge, SASE. The acronym is pronounced "sassy." According to research company Gartner, 60% of enterprises will have plans in place to adopt SASE networks by 2025, and that's up from just 10% in 2020. In other words, there's a lot of tremendous tailwind behind this company, and Zscaler's management puts its addressable market at $72 billion right now and that figure it could get bigger as the company continues to expand its target market.
In terms of competitive edge, Gartner has recognized these scalar as an industry leader for 10 consecutive years. And if you've ever seen a Gartner Magic Quadrant, the leaders are positioned in the upper right-hand Square. Zscaler is the only company in the upper right-hand quadrant on the most recent Gartner Magic Quadrant for secure web gateways. So it has a strong competitive position in the industry. And like I mentioned earlier, Zscaler handles a lot of data -- there over 200 million requests made through its platform each day. That means that sees a lot more traffic. It sees a lot more threats than any enterprise is going to handle by itself. This is kind of a network effect here. As Zscaler inspects more traffic, sees more threats, blocks more threats, it becomes better at doing that. And that makes the platform more effective for its users, which theoretically should bring more users to the platform, bringing more data onto the platform, and driving that flywheel.
In terms of customer satisfaction, Zscaler has a net promoter score of 74. For reference, a good scores is typically over 50, and over 70 is usually considered excellent, or world-class. So the company has strong rapport with customers and I think that shows up in its financial performance.
Over the last 12 months, the company generated $761 million in revenue. That's up 58%. Then, of particular note, its remaining performance obligation, which is deferred revenue that has not been recognized or not been billed yet. It's a combination of deferred revenue and then services that have not been billed. That jump 97% in the most recent quarters of growing more quickly than revenue. That just suggests that the company's future sales growth will be strong.
Zscaler has a net retention rate of over a 125% for the last four quarters, meaning it's customers are spending at least 25% more on average. Free cash flow positive -- $185 million in free cash flow over the last year. That's up over 200%. I think the company has a lot of tailwinds behind it. I think they have a strong competitive position, and I think their financial performance is impressive. I do own this company, and I would certainly be willing to add to my position right now.
