Zscaler, Inc (NASDAQ:) operates as a software-as-a-service (SaaS) cloud security company worldwide.

ZS became public on March 2018, I am neutral on ZS stock.

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Positive Macro Conditions

Cybersecurity has become one of the most important initiatives in our current times. Cybersecurity affects all enterprises, big and small.

Due to malware, data breaches, ransomware and other threats, it costs companies and others billions every year.

Many companies now prefer to work in the cloud with SaaS instead of having heavy hardware on-site. Zscaler is a cloud-based company that provides zero trust solutions.

Amazing Results

Zscaler generated $673million in revenue during fiscal year 2021. This was the year that ended July 31, 2021. It is an incredible 56% increase in revenue over FY 2020 and a significant acceleration in revenue growth. From FY 2019 to FY2020, the growth was 42%. Zscaler projects its market serviceable to reach $72 billion. Therefore, there is no constraint on market growth.

Zscaler’s gross margins are also impressive at 81% in FY2021. Once the company grows, this is crucial to its profitability. A long-term goal of the company is to achieve an operating margin between 20 and 22 percent.

All variable costs are used to calculate gross margins. The selling, general, and administrative (SG&A) expenses that follow are a mix of fixed and semi-fixed costs. Businesses that achieve scaling see their fixed and semifixed costs drop as a proportion of revenue. This is what leads to profitability.

Value Concerns

There are many young SaaS cybersecurity businesses in the market. Zscaler must be different in order to stand out over time.

Zscaler’s trailing 12 month price-to-sales ratio is 52.1x. To reach this level, the company must perform significantly.

It currently trades at 37.4x its current price-to-sales. CrowdStrike (CRWD), 39.76 ratio is comparable. However, CrowdStrike continues to grow at an even faster pace and is expected to increase its share in the future.

Wall Street’s Take

Wall Street analysts seem to be somewhat positive about ZS stock. They have a Moderate Buy consensus rating based on 16 Buys, seven Holds and no Sell recommendations.

The average Zscaler price target of $311.22 implies 20.4% upside potential.

Zscaler summary

Zscaler’s impressive performance is due to its position in a highly desirable sector, which has long-term tailwinds. ZS has to be different in this highly competitive sector.

It trades for a high valuation in comparison to its peers. The sector could offer more lucrative opportunities.

Disclosure: Bradley Guichard held a position at the time this article was published in Securities.

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