Zscaler (ZS) Stock Seems Like a Better Deal Compared to Crowdstrike (CRWD)

Stock (Symbol)

Zscaler (ZS)

Stock Price

$195

Sector

Data is as of

Expected to Report

Company Description

Zscaler, Inc. (Zscaler) is a cloud security company that has developed a platform incorporating security functionalities needed to enable access to cloud resources based on identity, context, and organization policies.

Its solution is a multi-tenant, distributed cloud platform that secures user-to-app, app-to-app, and machine-to-machine communications over various networks and locations.

The Company delivers its solutions using a software-as-a-service (SaaS) business model and sells subscriptions to customers to access its cloud platform, together with related support services.

Its Zero Trust Exchange is a cloud-native security platform that protects various customers from cyberattacks and data loss by connecting users, devices, and applications in any location.

The Company’s cloud services include Zscaler Internet Access (ZIA), Zscaler Private Access (ZPA), and Zscaler Digital Experience (ZDX). Source: Refinitiv

Sharek’s Take

Zscaler is the largest in-line cloud security platform in the world, securing 40 millions users from the largest global brands, and processing more than 300 billion transactions daily, while working with 40 million users from some of the largest global brands. The company is also delivering strong growth within US government agencies. One reason for this is Zscaler is the only cloud security service to have 2 products at the highest level of FedRAMP certification, Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA). 12 of the 15 federal cabinet-level agencies are customers. And as of June 2023, Zscaler served 8 out of the 10 largest financial services and insurance companies in the world outside of China.

ZS’s key products are:

• Zscaler Internet Access (ZIA) securely connects users to software as a service applications and internet destinations on any device, regardless of location. ZIA focuses on access control including a cloud firewall and prevents users from visiting unauthorized websites.
• Zscaler Private Access (ZPA) provides secure access to internally managed applications that are hosted either in data centers or on the cloud. ZPA connects users to apps without bringing them on the network, never exposes apps to the internet, and provides remote access over the internet without virtual private networks (VPNs). Basically, Zscaler Private Access replaces VPNs.
• Zscaler Digital Experience (ZDX) allows a company to isolate where the issue is occurring in the network, and determine whether it is caused by the user’s device, WiFi, the local internet provider or the app itself. Using ZDX, the organization can know if the issue is single case or a broader issue.

Here are some other facts about the company:

• Zscaler was built on the cloud, for companies using the cloud, and securely connects users to apps regardless of device, location, or network.
• The company connects users to applications and not the network, and that eliminates lateral threat movement.
• Management says its the clear market leader in zero trust applications and that no one comes close to the capabilities of its platform.
• Last qtr, ZS launched Zero Trust for branch, which enables one-to-one connectivity between branch devices and applications, thus securing branch IoT/OT devices and eliminating the risk of lateral threat moment. Zero Trust for branch is a key component of Zscaler’s Zero Trust SASE solution. It is the industry’s first single vendor SASE solution built on Zero Trust, this solution pairs Zscaler’s leading SSE with its new Zero Trust SD-WAN, which eliminates the security risks, costs and complexity of traditional SD-WAN.
• Zscaler recently announced the availability of Business Insights, a new addition to Zscaler’s enhanced Business Analytics Portfolio. Business Insights enables IT leaders to improve the employee experience, reduce cyber risk, and optimize SaaS spend and office utilization, all with their current Zscaler deployment.

Zscaler’s is more focused on time-to-market and growth rate than optimizing for gross margins. Thus, the company is “spending to grow” and the stock has a high P/E of 70. But operating margins have been increasing, so the profits are coming along. The stock’s Estimated Long-Term Growth Rate of 38% a year is nice and high. Last quarter I noted “the stock climbing so rapidly it seems fairly valued around this price”. This quarter, I see nice upside. ZS is part of the Aggressive Growth Portfolio and Growth Portfolio.

One Year Chart

This stock fell after earnings. That’s fine with me, as I feel its a buying opportunity.

The P/E of 70 is lower than the 87 P/E last qtr. But I value this stock on a price-to-revenue basis and we will get more into the valuation below.

The Estimated Long-Term Growth Rate of 38% is great, a little bit higher than the 37% last quarter.

Qtrly profit growth continues to look great, but is expected to decelerate in the upcoming qtrs. 

Earnings Table

Here are the regional highlights:

• Americas: 54% of total revenue.
• Europe, Middle East, and Africa: 31% of total revenue.
• Asia Pacific and Japan: 15% of total revenue.

ZS ended Q2 with 497 customers with greater than $1 million in ARR, adding 29 such customers this quarter. ZS also saw strength in $100,00 ARR customers this quarter. Which grew to 2,820, adding 112 customers sequentially. This continued strong growth of large customers speaks to the strategic role of ZS in their customers’ transformation initiatives. ZS reached their goal of $5 billion in ARR this quarter. Driven by their solid progress on strategy to scale it’s go-to-market engine. ZS had a strong federal quarter with particular strength in upsells to cabinet-level agencies. 

Annual Profit Estimates increased for the 8th straight qtr. For Fiscal 2024, management expects revenue increase in the range of $2.55 billion to $2.57 billion, reflecting a year-over-year growth of 31%.

Qtrly Profit Estimates for the next 4 qtrs are 38%, 6%, 10%, and 5%. For next qtr, analysts expect revenue to grow 28% year-over-year aligned with the management’s expectation.

Fair Value

ZS sells for 14x 2024 revenue estimates.

Current:
14 x $2.1 billion revenue est. = $29 billion market cap
$29 billion market cap / 149 million sales = $195

2024 Fair Value:
17 x $2.1 billion revenue est. = $36 billion market cap
$36 billion / 149 million shares = $242
Upside/Downside: +24%

2025 Fair Value:
17 x $2.7 billion = $45 billion market cap
$45 billion / 149 million shares =$304
Upside/Downside: +56%

ZS has a Fiscal Year end July 31st. So I will start looking ahead to 2025 next quarter.

Bottom Line

Zscaler (ZS) is one of the world’s best cybersecurity companies, but the stock got overheated last year, and came tumbling down during this Bear Market.

In terms of “value” Zscaler sells for 2024 14x revenue estimates while Crowdstrike sells for 20x revenue. Now Crowdsrike did have a better quarter, but these stocks used to have a similar multiple. Now, Crowdstrike is around 50% more expensive than Zscaler. I see ZS stock as a deal this quarter, with nice upside of around +24% compared to Crowdstrike’s +2%.

ZS moves up from 13th to 10th in the Growth Portfolio Power Rankings. The stock slides ahead of CRWD by moving from 10th to 9th in the Aggressive Growth Portfolio Power Rankings. 

Power Rankings

10 of 33

Aggressive Growth Portfolio

9 of 15

Conservative Stock Portfolio

N/A