Anticipating Growth Post-Correction

9月24日

Key arguments in support of the idea.

▪ We believe the stock is currently undervalued, given the strong fundamentals of the business.
▪ Zscaler stock presents an attractive entry point, with appealing valuation levels across key multiples.

Investment Thesis

Zscaler Inc. (ZS) is an American cloud cybersecurity company headquartered in San Jose, California. The Company provides cloud-based services designed to protect enterprise networks and databases and is ranked among the top 10 companies in its sector. Zscaler has been recognized as a Leader in the Gartner Magic Quadrant 2024 rankings for the Security Service Edge (SSE) category, marking its third consecutive year in this position. Before its inclusion in the Magic Quadrant for SSE, the Company was acknowledged as a leader for ten consecutive years in the Magic Quadrant for Secure Web Gateway (SWG). Zscaler offers an all-in-one Zero Trust Exchange platform, which delivers a comprehensive suite of cloud-based security services. This platform secures all enterprise traffic, provides intelligent routing through the fastest channels, and streamlines access management.

We believe the stock is currently undervalued, given the strong fundamentals of the business. The recent stock price correction, following weaker-than-expected management guidance for the quarter, was influenced by several key factors: 1) the introduction of lower-margin products in their early stages, including ZDX, Zero Trust solutions, and AI analytics; 2) the application of a projected non-GAAP tax rate of 23%.; 3) increased capital expenditures for data centers, driven by investments in cloud and AI infrastructure upgrades; and 4) staffing adjustments related to the new go-to-market strategy. Zscaler shares have corrected by over 19% due to the factors mentioned above. Nevertheless, business fundamentals remain stable, and the impact of the new tax rate and personnel changes is expected to be one-time. New product introductions and increased capital expenditures on data processing centers are fostering a favorable environment for the Company’s organic growth. Additionally, strong demand for cybersecurity services is a key growth driver. Organizations are investing heavily to protect against hacks, data breaches, and potential losses, reinforcing Zscaler's resilience and growth prospects. Cyberattacks globally have surged, with a 30% increase in weekly attacks on corporate networks in Q2 2024 compared to the same period in 2023, and a 25% rise from Q1 2024. On average, organizations face 1,636 attacks per week, highlighting the escalating threat landscape.

Zscaler stock presents an attractive entry point, with appealing valuation levels across key multiples. The Company’s stock is currently trading at a discount relative to key multiples when compared to the segment leader and its historical valuation levels. For instance, Zscaler's P/FCF ratio for the next 12 months is 45.1x, which is lower than that of its main competitor, CrowdStrike Holdings, at 58.7x. Additionally, this ratio is below the Company’s historical average of 64.9x. This suggests that the stock is an attractive entry point and highlights its potential for further growth.

The target price for the shares is $195, the rating is Buy. We recommend setting a stop loss at $150.