Zscaler has exited, but some investors may think it's too expensive.
Z scaler (ZS 0.73%) has emerged as one of the top cybersecurity companies. Zero Trust He is a leader in security (hence the name), but he provides cybersecurity in many ways.
However, competing cloud strike, palo alto networks, fortinetInvestors may be hesitant to buy this stock, which has a forward P/E of nearly 70. Given that situation, have investors waited too long to buy this cybersecurity stock? Let's take a closer look.
Current status of Zscaler
As mentioned earlier, Zscaler has become one of the top cybersecurity companies due to its role as an innovator in zero trust security.
This is important because the advent of the cloud and wireless mobile devices has completely turned cybersecurity on its head. This transition has made the traditional firewall approach to security obsolete in many ways and requires a different strategy.
Zero Trust security treats every user as a potential threat. Determine access using characteristics such as rank, location, and device of individuals within your organization. Additionally, we allow a limited degree of access to reduce the damage in the event of a security breach.
Additionally, customers increasingly prefer purchasing most or all of their security products from one company. To achieve this objective, Zscaler offers products such as Endpoint Security and Cloud Firewall, allowing Zscaler to upsell customers beyond its Zero Trust products.
Furthermore, Fortune Business Insights predicts that the global cybersecurity market will grow at an average annual rate of 14% through 2030. With such growth, a rising tide is likely to lift all ships in that industry.
Zscaler’s financial challenges
Zscaler stock's problems are reflected in its financial and other metrics. In the first two quarters of fiscal 2024 (ending January 31st), Zscaler generated just over $1 billion in revenue, an increase of 38% compared to the same period in fiscal 2023, putting it in a strong position. Masu.
Additionally, net revenue retention for the fiscal second quarter was 117%. Although down from the previous quarter, this still means the average long-term customer spent 17% more on his Zscaler products than last year, indicating solid revenue growth. Masu.
The problem lies in profitability. Unlike most of its peers, Zscaler has never turned a profit. Losses for the first half of fiscal 2024 were approximately $62 million, down from losses of $126 million for the same period in fiscal 2023.
This loss will be a mixed blessing for investors. Achieving profitability remains a difficult goal as stock-based compensation expenses hit his $270 million mark. Nevertheless, stock-based compensation is a non-cash expense. This enabled Zscaler to generate positive free cash flow of $326 million in the first half of fiscal 2024, limiting the negative impact of losses.
This factor may explain why investors have largely overlooked net losses. Despite falling nearly 30%, the stock has risen more than 60% in the past year.
Additionally, while the valuation seems expensive, it's not outlandish. With a P/S ratio of about 14, it is more expensive than Fortinet and Palo Alto, but sold at a greater discount than CrowdStrike. Nevertheless, Zscaler is the only one of these four companies without his P/E, so many investors may feel more comfortable buying one of its competitors.
ZS PS ratio data by YCharts
Is it too late to buy Zscaler stock?
Given Zscaler's current situation, it may not be too late to buy, but the bigger question is whether the company is a buy compared to its peers. Indeed, cybersecurity should continue to be a rapidly growing field for some time to come, and the company's leadership in zero trust security means the company's revenue and stock price will likely increase over time. .
Even more uncertain is whether Zscaler can outperform its peers. Since it has a higher sales multiple than most stocks other than CrowdStrike, investors may ignore it in favor of lower-cost stocks that earn profits. This situation makes Zscaler a somewhat risky option, although it should be a boon for investors.
Will Healy has positions at CrowdStrike and Zscaler. The Motley Fool has positions in and recommends CrowdStrike, Fortinet, Palo Alto Networks, and Zscaler. The Motley Fool has a disclosure policy.
