Is Zscaler stock still a top cybersecurity stock in 2024?

After a year of strong gains, the stock price Z scaler (ZS -1.28%) We encountered some bumps on the road. However, this is not to say that cloud-native cybersecurity leaders are underperforming.

On the contrary, the company's performance is very strong, but growth continues to be slow. I remain optimistic about his Zscaler and his cloud security companies, but will this still be his top buy cybersecurity stock in 2024 and beyond?

Are Zscaler's top competitors a threat?

Let's start this discussion by recognizing the changes brought about by the top pure-play cybersecurity companies and Zscaler's competitors. palo alto networks (PANW -2.19%) It was just announced. CEO Nikesh Arora outlined new go-to-market strategies in the last quarterly update, saying Palo Alto will continue to offer security products and services over the next year or so until customer agreements with competing security companies expire. Then he said. This is a kind of price competition, so to speak, and will temporarily reduce Palo Alto's growth rate.

Zscaler CEO Jay Chaudhry doesn't think this will work. However, while Zscaler and Palo Alto overlap in security products, the latter works on a blend of traditional network hardware and new cloud-based services. Zscaler's services aggregate all network traffic into one cloud-based service and secure access with zero trust (continuously verifying a user's identity, including passwords and two-factor authentication) .

In other words, while Zscaler goes head-to-head with Palo Alto, the two companies can coexist and thrive given the different customer needs they serve.

Either way, Zscaler shares fell after the latest report on the outlook for slower growth. As we wrote about last year, the economic slowdown was always expected and was not due to Palo Alto's new aggressive strategy in the cybersecurity market. Zscaler continues to grow, and as we grow, the pace of expansion will naturally slow down. Management itself has long hinted that something like this would happen.

Data source: Zscaler. Note: The entire 2024 fiscal year is the 12 months ending in July 2024. YOY = change from previous year.

However, growth is growth, so we can't discount Zscaler's rapid rise up the rankings too much. It is a standout winner in the cybersecurity market and currently ranks as one of the largest pure-play enterprise security software companies, as measured by revenue.

Data by YCharts. TTM = trailing 12 months.

Is Zscaler the best cybersecurity stock?

Expansion rate aside, some investors may not like Zscaler's current situation. It still has a net loss. Based on Generally Accepted Accounting Principles (GAAP), operating loss and net loss for the prior quarter (second quarter of fiscal 2024, ending January) were $45.5 million and $28.5 million, respectively.

Indeed, Zscaler is gradually approaching GAAP breakeven and has been generating adjusted profitability and positive free cash flow (FCF) for some time. Last quarter's FCF was $101 million, with an FCF margin of 19%.

Most of the difference between the GAAP metrics is in employee stock compensation (SBC), including stock compensation to Chaudhry (in total, the family still owns approximately 35% of the outstanding stock).

However, despite the high SBC ratio, Zscaler continues to outperform expectations in FCF per share growth.

Data by YCharts.

The only problem is that, as of this writing, Zscaler is still trading at a high premium of approximately 68x trailing 12-month FCF. This premium has remained high over the last year, even as overall growth continues to slow.

Zscaler cannot be ignored as a top player in the cybersecurity world. However, given the high stock price and inherent volatility of the stock (which has been particularly evident in the wake of recent earnings releases), investors may be discouraged from using dollar-cost averaging to build positions over time. This should be considered. Personally, I'm happy to own Palo Alto Networks stock. fortinetand cloud strike for the time being.