Zscaler Inc. (Ticker: ZS) - Brief Breakdown
In my Brief Breakdowns,I pick a stock and present opposite sides – I present the bullish argument and the bearish argument.
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Company Description and Qualitative Analysis
Zscaler Inc. operates a cloud security company and provides Zscaler Internet access solution which provides its users with servers, operational technology, Internet of Things device secure access to externally managed applications. Zscaler offers software as a service (SaaS) and multiple other products in the cyber security realm.
Quantitative Analysis
At the time of this writing (6/05/2022), ZS is trading at $156.93 with a 52 week range of $125.12 - $376.11 and a market cap of $22.14B. In Q3 of 2022 Zscaler saw revenue grow 63% YoY to $286.8 million, calculated billings grow 54% YoY, deferred revenue grow 65% YoY, and GAAP net loss grow to $101.4 million compared to $58.5 million. Return of equity (ROE: Net Income / Total Equity *100) of ZS is -70.17% and net margin (net income / revenue) is -38.52%. The price to earnings (price per share / earnings per share) ratio was -59.4 and the debt to equities ratio (total liabilities / total equity) is 3.75. This financial analysis was done using financialstockdata.com (sign up using our promo code GCI to get the first month of the premium tool FREE here). You can view ZS’s Q3 2022 earnings here and their 2021 Annual Report here.
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Bullish Thesis
Here are three points to support the bullish thesis updates:
Positive Quarterly Results: Last quarter Zscaler showed incredible earnings and even raised its guidance for the remainder of 2022. This is extremely positive as companies generally try to project earnings fairly closely to what they believe will happen to give investors guidance. By raising the projections Zscaler is not only saying this positive result is great for the previous quarter but the outlook for the rest of the year looks promising.
Prime to Acquire more Market Share: Zscaler currently only has 0.19% of the network security market share, an extremely low number. This is positive in a sense if you believe the company's mission and believe that the leadership of the company can acquire more of the network security market share you should be licking your chops seeing this small percentage. Once customers are poached the moat for keeping customers is generally pretty good for this business so the initial hurdle will be simply acquiring customers.
Diversifying: Zscaler simply does not have this large of a market cap by only having 0.19% of market share of one sector. Zscaler has multiple products and is now diversifying into different sectors to allow for more stable growth of the business. Once Zscaler has obtained more market share of network security the business will begin to thrive. Currently ZS is investing in development of new products and services and will continue to invest in the business for the time being.
Bearish Thesis
Here are three points to support the bearish thesis:
Slowed Growth: Zscaler reported great earnings and raised guidance for the end of year for 2022, but the underlying metrics suggested slowing growth. In a time where more companies and people go digital it is extremely worrisome that growth is slowing. I would like to see accelerated growth continue for a company but there are some cracks being formed in Zscaler’s business. As the underlying business metrics begin to turn around, then I will have more faith that during a potential economic downturn ZS will prosper.
Difficulty Acquiring New Customers: Zscaler is in a great business for keeping customers but a difficult business to acquire new ones. Businesses generally sign yearly or multi-year contracts with cyber security companies and while Zscaler is in the process of acquiring new customers it may have a difficult time initially. Hopefully this is proven wrong and Zscaler can immediately acquire new customers, but the training in a business required to be comfortable with cyber security software takes time so transitions are not always smooth.
Losing Money: If you have listened to me on podcasts or in my Twitter spaces, I believe that growth companies are in for a rude awakening during this economic downturn. Companies such as Zscaler have had such easy access to capital that if the FED continues to raise rates it will be more difficult to acquire. Without the easy access to capital, growth companies will have difficulty continuing to invest in their business and will operate at a negative. Operating at a negative has a short time span and is not sustainable. Hopefully for Zscaler’s sake they can start posting positive revenue and will continue to grow, but unfortunately in the short term I am not extremely optimistic.
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Brandon
Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.