Company Reports

We are raising our fair value estimate for narrow-moat Zscaler to $213 per share from $183. Our fair value estimate raise is primarily spearheaded by a revised outlook on the firm’s long-term growth prospects as we expect vendor consolidation and artificial intelligence, or AI, to drive greater demand for Zscaler’s security solutions. The firm’s solid financial results for the second quarter and better-than-expected guidance for the upcoming quarter and the remainder of fiscal 2024 also support our fair value increase. We continue to be bullish on the overall opportunity in front of Zscaler and view its solutions as uniquely poised to benefit as customers increasingly shift their architectures from on-premises to the cloud, creating tailwinds for Zscaler’s cloud-first security solutions.

We see Zscaler as a pioneer and leader in zero-trust security solutions, an area of cybersecurity primed for growth due to secular trends such as increased digitization of an enterprise and a convergence of networking and security. We have a positive outlook on Zscaler’s solutions as the firm stands to materially benefit from these trends. The firm has built out a narrow economic moat by developing a sticky product portfolio, as evidenced by its strong net and gross retention metrics.

We are maintaining our $183 fair value estimate for narrow-moat Zscaler after the firm kicked off fiscal 2024 with strong sales growth and profitability. While macroeconomic uncertainty continues to affect customer decisions, we were encouraged to see Zscaler’s strength in landing new business as well as expanding existing client spending. With an eye on the long term, we believe Zscaler stands to materially benefit as organizations seek cloud-native security vendors to manage their increasingly complex security needs. Further, as a security vendor that provides multiple solutions across a client’s security apparatus, we think Zscaler will benefit from increased vendor consolidation as customers seek to refocus their security spending toward a smaller set of vendors. With Zscaler’s shares trading down after the earnings report, we view them as fairly valued.

We see Zscaler as a pioneer and leader in zero-trust security solutions, an area of cybersecurity primed for growth due to secular trends such as increased digitization of an enterprise and a convergence of networking and security. We have a positive outlook on Zscaler’s solutions as the firm stands to materially benefit from these trends. The firm has built out a narrow economic moat by developing a sticky product portfolio (as evidenced by its strong net and gross retention metrics.)

We raise our fair value estimate to $183 from $170 for narrow-moat Zscaler after the firm finished fiscal 2023 with strong financial results and guidance for the upcoming year. While the macroeconomic environment remains uncertain, we were impressed by Zscaler’s ability to close a record number of deals with an annual contract value of more than $1 million. We attribute this strong performance upmarket to the impressive value proposition Zscaler’s platform offers its customers, especially as they seek cloud-native security vendors to manage their increasingly complex security needs. As we look ahead, we expect Zscaler’s products to remain top-of-mind for companies and so forecast robust growth for the firm over the next decade as investments in cloud-native security solutions ramp up. The firm’s shares traded slightly down after the earnings report, and we view them as marginally undervalued.

We are maintaining our $170 fair value estimate for narrow-moat Zscaler after the firm reported strong third-quarter results that were in line with the preliminary results the firm put out a few weeks ago. We continue to be impressed by Zscaler's continued ability to land and expand its client base despite ongoing macro-induced client spend optimization. We attribute this success to not only strong execution from Zscaler's side but also the stickiness of Zscaler's solutions, which are hard to rip out despite customers seeking to cut IT spend in light of macro uncertainty. The firm's shares traded slightly down after the earnings report after climbing almost 50% since the preliminary report in early May. Despite the valuation uplift over the last few weeks, we continue to view Zscaler as attractively priced for long-term investors seeking high-quality cybersecurity exposure.

Narrow-moat Zscaler put out preliminary fiscal third-quarter results ahead of its full release slated for the beginning of June, with sales and profitability exceeding our estimates. While we are not changing our $170 fair value estimate as we wait for full results, Zscaler's impressive performance underscores our thesis that cybersecurity firms are relatively insulated from ongoing IT budget cuts. The shares are up more than 20% following the May 8 announcement. Despite the pop, we believe that Zscaler is undervalued, trading at an attractive price for long-term investors willing to stomach near-term volatility.

We are maintaining our $170 fair value estimate for narrow-moat Zscaler after the firm closed out a mixed second quarter with strong growth tempered by continued macroeconomic tightness. While the turbulent macroenvironment continues to affect near-term results, we remain optimistic of Zscaler’s long-term opportunity. We believe that Zscaler’s zero-trust security offerings continue to be industry leading, and that the firm stands to materially benefit from the convergence of networking and security. Not only does the firm benefit from these secular tailwinds, but the firm has also built an economic moat around its business through strong customer switching costs and network effects associated with its solutions. With Zscaler’s shares down more than 10% after hours, we think that the firm is trading at an attractive price for long-term investors.

We are maintaining our $170 fair value estimate, narrow economic moat rating, positive moat trend rating, high uncertainty rating, and exemplary capital allocation rating for Zscaler. We continue to have confidence in the firm’s ability to drive long-term shareholder returns as its solutions continue to benefit from the convergence of networking and security.

We see Zscaler as a pioneer and leader in zero-trust security solutions, an area of cybersecurity primed for growth due to secular trends such as increased digitization of an enterprise and a convergence of networking and security. We have a positive outlook on Zscaler’s solutions as the firm stands to materially benefit from these trends. The firm has built out a narrow economic moat by developing a sticky product portfolio (as evidenced by its strong net and gross retention metrics.)

We are lowering our fair value estimate for narrow-moat Zscaler to $170 from $211 primarily because of a reduction in our top-line growth estimates as macroeconomic headwinds bear down on the firm. While last quarter remained strong despite the macro tightness, this quarter painted a different picture for Zscaler as the firm noted macroeconomic pressures affecting its billings as customers scrutinized their spend on technology. While we continue to view Zscaler's zero-trust security offerings as industry-leading, we expect elevated macroeconomic uncertainty to weigh down on the firm’s financials over the coming quarters. Zscaler’s shares fell 10% after hours. As a result, despite our fair value estimate revision, we think that the firm’s shares are trading at an attractive price for long-term investors willing to stomach the near-term volatility.

Zscaler wagered heavily on the secular trend of cloud computing and how users would directly connect to cloud-based resources. Its bet has paid dividends, as it has leveraged a distributed cloud to deliver a multitenant security platform that offers security capabilities traditionally sold as purpose-built appliances. Although Zscaler has been at it since 2007, we think its business model and security approach are in their early innings, and we see a long runway for growth as enterprises adopt cloud-centric security and zero-trust architectures. Zscaler’s software-as-a-service business model and the benefits that accompany this mode of software consumption, combined with an innovative product suite and a differentiated channel sales model, are all factors that we think will facilitate continued success winning enterprises that are consuming more cloud-based resources.

We are maintaining our fair value estimate of $211 for narrow-moat Zscaler after the firm reported strong results to close out fiscal 2022. The better-than-expected results’ impact on our fair value estimate was neutralized by the firm’s expectation of fiscal 2023 revenue below our prior estimates. At the same time, however, we reiterate our confidence in Zscaler’s business and maintain our belief that the firm will continue to grow rapidly with the secular tailwinds of zero-trust security and digital transformations behind its back. Despite shares being up more than 11% after hours (after a 4% ascent during trading hours today), we still view the shares as undervalued.

Zscaler wagered heavily on the secular trend of cloud computing and how users would directly connect to cloud-based resources. Its bet has paid dividends, as it has leveraged a distributed cloud to deliver a multitenant security platform that offers security capabilities traditionally sold as purpose-built appliances. Although Zscaler has been at it since 2007, we think its business model and security approach are in their early innings, and we see a long runway for growth as enterprises adopt cloud-centric security and zero-trust architectures. Zscaler’s software-as-a-service business model and the benefits that accompany this mode of software consumption, combined with an innovative product suite and a differentiated channel sales model, are all factors that we think will facilitate continued success winning enterprises that are consuming more cloud-based resources.

We are lowering our fair value estimate for narrow-moat Zscaler to $211 per share from $265 as we are taking a more conservative stance on our long-term profitability assumptions. Nonetheless, our new fair value estimate is still solidly above the current share price. We continue to believe that the market’s reaction to recent macroeconomic events has been overdone, with many high-quality software names being put to the sword as investors fled from tech.

Zscaler wagered heavily on the secular trend of cloud computing and how users would directly connect to cloud-based resources. Its bet has paid dividends, as it has leveraged a distributed cloud to deliver a multitenant security platform that offers security capabilities traditionally sold as purpose-built appliances. Although Zscaler has been at it since 2007, we think its business model and security approach are in their early innings, and we see a long runway for growth as enterprises adopt cloud-centric security and zero-trust architectures. Zscaler’s software-as-a-service business model and the benefits that accompany this mode of software consumption, combined with an innovative product suite and a differentiated channel sales model, are all factors that we think will facilitate continued success winning enterprises that are consuming more cloud-based resources.

We are maintaining our $265 fair value estimate for narrow-moat Zscaler after its third-quarter results blew away our expectations for growth and earnings. Shares increased slightly after reporting, and we still believe there is substantial upside for long-term investors. We expect robust demand for Zscaler's solutions to continue, due to being at the forefront of protecting Internet-bound requests as organizations undergo digital transformations. The major trend of organizations adopting zero-trust security architecture is aligned with Zscaler's portfolio, and we think Zscaler will keep landing more substantial deals as organizations adopt various products and consolidate security spending. Zscaler lowers the complexity of security management while its customers become further locked into its product ecosystem. We foresee no shortage of growth opportunities for Zscaler's core solutions and as it broadens its offerings into digital experience monitoring and cloud workload protection.

We are reiterating our fair value estimates for wide-moat network security vendors Check Point Software Technologies at $140, Fortinet at $340, and Palo Alto Networks at $585 after these more-established firms fell about 20% over the last month. We are also reaffirming our fair value estimates for narrow-moat cloud-based security firms CrowdStrike Holdings at $225, Okta at $280, and Zscaler at $265 after these higher-growth firms retracted by almost 40% over the last month. Our top pick is Okta, but all are trading at attractive valuations, albeit with different growth profiles.

We are maintaining our fair value estimate of $265 per share for narrow-moat Zscaler after it reported strong second-quarter results. Zscaler continues to achieve revenue expansion to the tune of 63% year over year behind secular tailwinds stemming from organizations making digital transformations and increased adoption of zero-trust security. That said, our model already incorporates robust growth. As expected, Zscaler’s expanded product offering has enabled it to not only up- and cross-sell but to increase switching costs for its existing customers. These factors were on display as its dollar-based net retention rate was above 125% for the quarter. Newer product ZDX (digital experience) has been a notable component in Zscaler’s ability to upsell large customers through its ZIA (Internet access) bundle. With recent widespread sell-offs in the technology sector, we see shares as increasingly attractive.

We are raising our fair value estimate to $265 per share from $205 for narrow-moat Zscaler after its first-quarter results increased our confidence in a higher growth trajectory in the long term. Zscaler is greatly benefiting from organizations retooling their security postures due to digital transformation efforts coming from widespread remote working and the uptick in zero-trust security adoption, in our view. However, while we believe Zscaler is in the early stages of disrupting several facets of cybersecurity, we view shares as overvalued and think the market is expecting continued flawless results even as the company scales beyond management's anticipated $1 billion in revenue for fiscal 2022.