According to a forecast by research firm McKinsey & Company, damage caused by cyberattacks will top $10.5 trillion by 2025 -- a number that will have quadrupled since 2015.
Companies spent just $150 billion on cybersecurity in 2021, a number that grew by 12.4% in 2022 to $168 billion. Here's the problem: A survey suggests threat volumes doubled over that period, so McKinsey believes corporate investment in cyber protection is far too low.
The firm says companies should collectively be spending as much as $2 trillion on cybersecurity right now, more than 10 times what they're actually spending. While there's no guarantee the value gap will be filled, some cybersecurity providers are experiencing a surge in growth right now even in the face of a weak economic environment, pointing to elevated levels of demand.
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Zscaler (ZS 0.48%) just reported its financial results for the fiscal 2023 third quarter (ended April 30), and it blew away its prior guidance on multiple fronts. Its stock remains 60% below its all-time high amid the broader sell-off in the technology sector last year.
Here's why investors should buy the dip.
Modern networks call for modern security
Most companies are now relying on cloud computing to run their day-to-day operations. They can host their critical applications online, which allows employees to access them from anywhere. The cloud also breaks down geographic borders because departments can collaborate on key projects in a live environment, no matter which country they're in.
But that also creates risk. When employees are working in an office setting, management knows they're present and can physically see them accessing the IT infrastructure. However, when employees work remotely, management is simply relying on their user credentials (like a login and password) to identify them -- but sometimes, those important details are compromised, and malicious actors infiltrate the company's critical applications.
Zscaler's Zero Trust technology is designed to eliminate that threat. Each time a user attempts to sign in to a network, Zero Trust analyzes the device they're using and their location, in addition to their login credentials. If the attempt comes from the wrong computer or from the wrong country, there's a good chance the user's credentials have been stolen.
Zscaler is now focusing heavily on artificial intelligence (AI) to better protect its customers. Its Zero Trust Exchange is the largest security cloud in the world -- it thwarts 9 billion threats each day and ingests 300 trillion signals into its AI models, so they constantly learn and improve.
Additionally, when an employee accesses an application within the company's network, the Zero Trust Exchange connects them only to that application. Therefore, if a hacker does breach the network, they're isolated to one specific area and can't jump across to other assets.
Zscaler's revenue and customer growth surged in Q3
Zscaler currently has more than 6,000 customers globally, including 30% of the world's largest 2,000 companies.
But it's experiencing the fastest growth in its top-spending customer cohorts. The number of them contributing a minimum of $100,000 in annual recurring revenue jumped 29% year over year in Q3, to 2,432. But the number of customers spending at least $1 million per year soared 39% to 400.
That helped Zscaler bring in $419 million in revenue during the quarter, which was up 46% year over year and well above its $398 million forecast. Plus, thanks to some prudent expense management, the company was able to cut its net loss by more than half, to just $45 million or $0.32 per share.
Therefore, Zscaler is inching closer to generally accepted accounting principles (GAAP) -- "true" -- profitability, which is key in this difficult economic period because loss-making companies are typically considered riskier by investors. But after stripping out one-off and noncash expenses like restructuring charges and stock-based compensation, Zscaler was actually profitable on a non-GAAP basis to the tune of $0.48 per share -- a whopping 182% year-over-year increase and far better than its $0.39 forecast.
Zscaler's stock surged on the results, and it could go higher
Zscaler's strong Q3 results prompted the company to raise its revenue guidance for the fiscal 2023 full year to $1.59 billion, from $1.56 billion previously. It added to the list of things investors liked about the quarter, and they have sent its stock roughly 8% higher since the company reported on June 1.
But it's probably not done. Zscaler's stock might be trading 60% below its all-time high, but that hasn't deterred the professionals on Wall Street from being optimistic about its prospects. The Wall Street Journal tracks 38 analysts covering Zscaler, and 24 of them have given its stock the highest-possible buy rating. Two are in the overweight (bullish) camp, and the remaining 12 recommend holding. Not a single analyst recommends selling.
Given the size of the opportunity that exists in the cybersecurity industry today -- without factoring in future growth, which is almost a certainty -- Zscaler stock would make a great addition to any portfolio, especially while it's still so heavily beaten down.
