Black Friday and Cyber Monday sales just wrapped up, and if you're like me, you probably did all of your shopping online. Technologies like cloud computing have allowed businesses to create seamless digital experiences for their customers, in addition to managing their global workforces and streamlining their operations.
Those are all positive things, but having an around-the-clock presence online is also making companies vulnerable to cyberthreats. In fact, research from McKinsey & Company estimates cyberattacks will cause a whopping $10.5 trillion in damage to businesses each year by 2025. That number will have tripled since 2015.
As a result, McKinsey says the corporate sector should be spending about $2 trillion per year on cybersecurity to protect against those threats. But here's the problem: Businesses are only on track to spend about $189 billion in 2023, leaving a massive $1.8 trillion gap.
As the cost of foregoing cybersecurity piles up, providers like Zscaler (ZS 1.28%) are going to benefit as more businesses rush to protect themselves. Zscaler stock remains 45% below its highest levels, but the company just delivered another blockbuster quarterly result. Here's why investors should consider buying the stock.
Image source: Getty Images.
Zscaler is disrupting decades-old cybersecurity practices
Cloud computing makes cybersecurity far more complex than it used to be. In years past, businesses would store their critical data and applications on physical servers they maintained onsite, which meant firewalls and antivirus software offered sufficient protection. Today, those companies use centralized data centers to host their applications, which means employees can access them online no matter where in the world they are working from.
Those workers are a major source of vulnerability for any cloud network. In fact, CrowdStrike estimates 90% of successful attacks originate at the endpoint (a computer or device used by a staff member) via incoming emails, messages, or even online purchases. If a remote worker has their credentials (username and password) compromised, it's nearly impossible for management to identify a breach when a malicious actor uses them to access the company's network.
That's where Zscaler's Zero Trust technology shines. It treats all login attempts as hostile and uses context to weed out potential attackers. When a user signs in, Zscaler analyzes their device and their location to confirm it's an authorized employee. For example, if a staff member located in Dallas, Texas, is suddenly signing in from Russia, that's an immediate indication their credentials may have been compromised.
But Zscaler's technology goes a step further. It only connects the employee one-to-one with the applications they are authorized to access. That means even if an attacker bypasses Zero Trust, they are isolated to a small area of the network and can't move laterally to breach other parts.
Zscaler continues to deliver strong financial results
Zscaler just reported its results for the fiscal 2024 first quarter (ended Oct. 31). During the conference call with investors, CEO Jay Chaudhry said cybersecurity is still the No. 1 information technology spending priority among the hundreds of executives he speaks to.
It's becoming increasingly important in larger, more complex organizations, and that's being reflected in Zscaler's results. By the end of fiscal Q1, the company had 468 customers spending a minimum of $1 million annually on its cybersecurity products, up 34% from a year ago. Overall, Zscaler now serves more than 7,700 businesses, including 40% of the Fortune 500.
But in addition to adding new customers during the quarter, Zscaler's net retention rate was 120%, which means existing customers are spending 20% more than they were in the prior-year period. It helped drive Zscaler's revenue to $496 million, an impressive 40% year-over-year increase.
That was a faster revenue growth rate than two of the company's main competitors -- CrowdStrike (37%) and Palo Alto Networks (20%) -- which implies Zscaler is gaining market share.
Why Zscaler stock is a buy on the dip
Aside from the positive trends for Zscaler's business across the broader cybersecurity industry, the company is also investing in expanding its artificial intelligence (AI) capabilities to offer customers more advanced protection.
Zscaler prevents over 9 billion security incidents per day from over 360 billion transactions (a transaction is a website or application visit). That provides the company with a monumental amount of data it uses to train its AI and machine learning models to more accurately identify threats and automate incident response.
Zscaler recently launched an industry-first product called Risk360, which uses AI to give organizations live updates on their risk posture and corrective actions they can take to ensure maximum protection. The company is also preparing to release a new tool called Breach Predictor, which uses generative AI to simulate breach scenarios so risks can be eliminated before they become a reality.
AI-powered features are set to be a huge long-term financial windfall for Zscaler because the company charges 20% more money for security bundles with them included. They could play a significant role in growing Zscaler's annual recurring revenue from $2 billion today to management's target of $5 billion (and beyond) in the long term.
Considering Zscaler stock is trading at a steep 45% discount to its all-time high, now is a great opportunity for investors to buy and hold for the coming years.
