Wall Street investment bank Morgan Stanley surveyed a group of chief information officers earlier this year. They indicated that cybersecurity is the last expense they intend to trim, even in the event of a recession. That should come as no surprise since a similar survey of corporate leaders conducted by consulting firm PricewaterhouseCoopers revealed that cyber risk was considered the No. 1 threat to their revenue.
In truth, companies are exposed more to cyber threats than ever because they continue digitizing their operations, and attackers are becoming increasingly sophisticated. That's why cybersecurity powerhouse Zscaler (ZS 0.30%) is thriving even in this weak economy. Yet, its stock has been caught up in the broader tech sell-off and it currently sits roughly 60% below its all-time high.
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Zero trust is the way forward for modern companies
Zscaler has made its name on the back of its zero trust protection philosophy. As more businesses shift their operations online using cloud computing technology, the attack surface is rapidly expanding, leaving them vulnerable to bad actors who could be located anywhere in the world.
Traditional cybersecurity technologies focus on creating a protective perimeter around networks. But in the modern world, that's no longer enough. For example, remote work has become more common, meaning companies must carefully manage how employees access critical assets to prevent them from becoming points of vulnerability. After all, placing a perimeter around a network is unlikely to save it from a hacker who has gained access using valid credentials.
Zscaler's Zero Trust Exchange is revolutionary in the sense that it can connect employees directly to the applications they need rather than the company's entire network. Therefore, even if credentials are stolen or compromised by a malicious threat, the risk stops at that application because the attacker can't move laterally to steal other assets.
Zscaler's zero trust technology is aptly named because it quite literally does not trust any user. When an employee tries to access an application, Zscaler validates them through context by analyzing their role within the organization, their location, and the device they're using.
On that note, the Zero Trust Exchange stops more than 7 billion security and policy violations every single day.
Zscaler's revenue continues to soar
Zscaler generated $1.09 billion in revenue during fiscal 2022 (ended July 31), growing 61% compared to the prior year. It was the fastest growth rate since the company was listed publicly in 2018.
It just followed that up with another strong result in the first quarter of fiscal 2023 (ended Sept. 30), with revenue topping $355 million, soaring 54% year over year. That prompted the company to raise its full-year fiscal 2023 forecast already -- Zscaler had expected to generate $1.50 billion in revenue, but it now anticipates as much as $1.53 billion.
Data source: Zscaler. Chart by author.
The number of Zscaler customers contributing at least $1 million in annual recurring revenue surged by 55% to 340 in Q1. Another positive was the company's net retention rate holding steady at 125%, meaning customers are spending 25% more money with Zscaler each year.
Those metrics indicate two things: the rapidly growing demand for advanced cybersecurity tools among large organizations and a very high level of customer satisfaction.
Wall Street is on board with Zscaler stock
As with most fast-growing technology companies, Zscaler's rapid expansion has come at the expense of profitability. But there has been some improvement: In Q1, its net loss came in at $68.1 million, a 25% reduction compared to the same period last year.
It's important for Zscaler to strike a balance between growth and reaching profitability. As highlighted by its net retention rate, each customer it acquires becomes more valuable with each passing year, so it would be detrimental to stop investing in sales and marketing. Plus, with over $1.08 billion in cash, equivalents, and short-term investments on its balance sheet, the company can afford to run at its current loss rate for several years.
One thing is abundantly clear: Wall Street is very bullish on Zscaler. Of the 39 analysts The Wall Street Journal tracked, 27 have given Zscaler's stock the highest-possible buy rating. The remaining analysts are split between overweight (bullish) and neutral ratings -- but most notably, not a single one recommends selling.
Given that Zscaler stock is down roughly 60% from its all-time high right now, this might be a golden opportunity for investors to take a long-term position.
