The U.S. is in the throes of an economic slowdown as inflation soars and interest rates tick higher, squeezing the spending power of consumers. It's a challenging time for the corporate sector, but especially for technology companies, which have seen their valuations mercilessly slashed this year.
But when it comes to growth, one innovator is bucking the trend. Zscaler (ZS 1.97%) just reported its financial results for the fiscal 2022 year ended July 31, and its sales grew at the fastest pace in its history as a public company.
Zscaler is in the cybersecurity business, which is front of mind for most of its corporate customers as they continue migrating their businesses into the cloud. The overwhelming majority of Wall Street analysts who cover Zscaler stock are calling it a buy -- in fact, not a single one recommends selling.
Zero trust, maximum protection
The modern business world is driven by the cloud. It's a rapidly growing technology that helps companies shift their operations online, which allows them to effectively run a borderless business. Employees can work and collaborate remotely, and important digital assets can be accessed from any place, at any time, by authorized staff.
But the cloud opens organizations up to risks they've never faced before because operating in the digital realm significantly increases the size of the attack surface. Companies used to protect physical assets, which meant threats were localized. But online, a threat can come from literally anywhere in the world. That's where Zscaler steps in with its revolutionary zero-trust approach.
As the name implies, the zero-trust concept is designed to treat all users as hostile. Traditional security models rely on approved IP addresses and protocols to determine which users within a network to trust, but that leaves the network vulnerable not only to access by intruders but also lateral movement across the organization's entire digital ecosystem.
With zero trust, each user is validated contextually by analyzing their location, device, and their role. Plus, users never actually connect to the network, but instead directly to the apps and resources they need. It's much harder for intruders to breach zero trust and, even if they do, they remain confined, with little ability to jump across to different assets.
No economic slowdown for Zscaler
Consumers might be tightening their belts this year, but Zscaler doesn't target consumers. It targets businesses, and according to a recent survey by investment bank Morgan Stanley, cybersecurity spending is one cost that businesses don't plan to slash -- even in a recession.
As a result, Zscaler's annual revenue just crossed $1 billion for the first time ever during fiscal 2022 (ended July 31). To top it off, that represented a 62% year-over-year increase, which is the fastest growth rate the company has achieved since listing publicly in 2018.
The Morgan Stanley survey is certainly supported by Zscaler's highest-spending customer segments. At the end of fiscal 2022, the company reported that 2,089 organizations are spending $100,000 or more annually with Zscaler. But it gets better, because 327 are spending $1 million or more, and that figure soared by 62% year over year. It further highlights that cloud-based cybersecurity is quickly becoming a must-have in the corporate world.
Wall Street is on board with Zscaler stock
Zscaler continues to invest heavily in expanding its business, which makes sense given its lightning-fast growth rates at the moment. As a result, it's sacrificing profitability, which is one reason investors have sent its stock 50% lower from its all-time high.
The company lost $390 million during fiscal 2022, but there are two things to consider. First, it doled out $430 million in stock-based compensation to remunerate its talent pool. Adjusting for that one line item, Zscaler was actually profitable for the year.
Second, the company has over $1.7 billion in cash, equivalents, and short-term investments on its balance sheet, so it can afford to continue spending aggressively for the foreseeable future.
Wall Street has thrown its support behind that high-growth strategy. Of the 29 analysts tracked by The Wall Street Journal, 23 have given Zscaler stock the highest-possible buy rating. Of the remaining six, two have an overweight (bullish) rating, and four are neutral. Not a single one recommends selling -- and why would they?
Cybersecurity is a growing industry in dire need of the technology Zscaler offers. The company places the value of its addressable market at $72 billion, so based on its revenue, it has barely scratched the surface of its opportunity. That leaves room for plenty of potential growth ahead.