Zscaler (ZS 1.28%) went public at $16 per share on March 15, 2018. It now trades at around $150, so a $1,000 investment in its initial public offering would have grown to nearly $9,400 in just over five years.
The cybersecurity company dazzled the bulls with its impressive growth rates. Between fiscal 2017 and fiscal 2022 (which ended last July), Zscaler's revenue rose at a compound annual growth rate (CAGR) of 54%. It currently serves more than 6,000 customers, including 30% of the Fortune 500, and secures over 300 billion transactions daily.
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Analysts expect its revenue to grow at a CAGR of 33% from 2022 to 2025, and for its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise at a CAGR of 54%. Those high growth rates suggest Zscaler's stock still has plenty of room to run -- even if it isn't cheap at 13 times this year's sales.
I've discussed Zscaler's strengths and weaknesses before, but today I'll dive deeper into three other aspects of its business that smart investors should know -- and whether they support the bullish or bearish cases for its future.
1. It's a cloud-native cybersecurity company
Zscaler's name was derived from its "zero trust" services, which are designed to treat everyone -- including a company's CEO -- as a potential threat. It provides its tools as cloud-based services, which are easier to "scale" as an organization expands.
That business model puts Zscaler in the new class of cloud-native cybersecurity platforms that don't require the installations of any on-site security appliances. That lightweight approach -- which is also used by its more diversified peer CrowdStrike -- is cheaper, easier to maintain, and doesn't take up any physical space.
The broader cloud-native software market could expand at a CAGR of 23.5% from 2023 to 2030, according to Verified Market Research. The global cybersecurity market could also grow at a CAGR of 13.8% during the same period, according to Fortune Business Insights. Zscaler seems well poised to profit from the secular expansion of both markets.
2. It expects generative AI to revolutionize zero trust technologies
Generative AI has become a hot topic over the past year with the rise of impressive platforms like ChatGPT and DALL-E. That's why it wasn't too surprising when Zscaler recently revealed at its Zenith Live 2023 conference that it would leverage generative AI technologies to upgrade its own zero trust tools and roll out new security services (including Data Protection for AI, AI Visibility and Access Control, and AI Total) for existing AI apps.
It also provided a glimpse at three other AI-oriented tools that are still in the beta and preview stages -- Security Autopilot, which leverages AI to learn an organization's cloud-based policies and recommend new ones to stop data breaches; Zscaler Navigator, a natural language interface that simplifies the management of its security services; and Multi-Modal DLP (data loss prevention) tools that can expand a company's data logs beyond text-only files to cover video and audio files.
All of these new AI services could give Zscaler a firm foothold in the generative AI market, which Valuates Reports estimates will expand at a CAGR of 32% from 2022 to 2031. They could also help Zscaler keep pace with its industry peers like CrowdStrike, which recently introduced its own generative AI platform, Charlotte; and Palo Alto Networks, which operates the AI-powered threat detection platform Cortex.
3. Insiders are still bullish on its future
Zscaler's stock might not seem like a screaming bargain right now, but insiders still bought four times as many shares as they sold over the past three months. They also bought about twice as many shares as they sold over the past 12 months.
By comparison, CrowdStrike's insiders only bought slightly more shares than they sold over the past 12 months. Palo Alto Networks' insiders sold about 30 times as many shares as they bought over the past 12 months. That warmer insider sentiment suggests that even sunnier days could be ahead for Zscaler's high-flying stock.
Do these facts favor the bears or the bulls?
All three of these facts support the bullish case for Zscaler. Its early-mover advantage in the cloud-native cybersecurity space gives it an edge against its older appliance-based peers, it's expanding quickly into the generative AI market, and insiders still seem overwhelmingly bullish on its long-term growth prospects. All of those strengths make it a great play on the long-term expansion of the cloud, cybersecurity, and AI markets.
