Saul and Tale of Two Cities


I see you like ZS and you jettisoned SHOP.

I know you don’t look at valuation was P/S of ZS is 21 vs 15 for SHOP.

I also know you dont like TA but for those that use it, ZS has a very vulnerable chart pattern that many would dexcfribe as a head and shoulders:……

But I digress…you jettisoned SHOP because of the “massive” slowdown in revenue growth that looks something like this:

2017: 75 75 72 71
2018: 68 62 58 (52)

Quite honestly…those numbers looked pretty good to me irrespective of the slowdown…to maintain a 55% YoY growth is pretty incredible growth at its present revenue base of over $1 Billion revenue run rate!

Now let’s look at ZS with an annual revenue run rate of $190 million (20% that of SHOP)…one would think its growth rate in this early seedling would be off the charts…but…guidance is for 31% this quarter…54% last quarter…49% before that.

They have small beats in last 2 quarters on earnings of 4 and 6 cents…maybe they really beat this quarter…though their last earnings call wasn’t suggesting that.

So just curious…you have one company doing over $1 Billion in revenue, P/S of 15 with growth rates of 55% and then another with $200 Million in revenue, P/S 21 and growth rate slowing to 31% and with a worrisome chart. Note that SHOP raised year end guidance to over 55% YoY revenue growth vs ZS year end guidance of 37%.

You jettisoned the former…as we walk into earnings on Dec 4th for ZS…care to explain what seems to be inconsistency in thought process?


Surely it’s about momentum?

At 55% yoy growth for year end guidance, 4th quarter yoy will be 42%. So in 8 quarters you’ve gone from 75% growth down to 42%. Yes, that’s still an amazing growth rate, but it is a very marked decline in growth.

Billings increased for ZS 65% in 2018 over 2017, accelerating from 62% in 2017 over 2016.
Dollar based retention rate has been increasing over the last 3 years.
Revenue had been 50% +
Guidance of 31% is pretty shocking. Was this explained? Last 8 quarters they’ve grown sequentially revenue. Is there a reason why Q1 2019 will be different? They only need to slightly beat Q4 2018 for growth to be 50%.

Also bear in mind that by recently becoming public, it adds a certain validity and publicity to their services. I remember the CEO of Blackline touting the same thing when they went public.

So with ZS you have a business potentially about to accelerate their business, whereas with SHOP you have a business that by all means is not peaking, but is slowing their growth rate. Incidentally, I’m currently longer SHOP than ZS and am a believer in Tobias being able to successfully pivot into additional revenue avenues. In the meantime they have a solid and still growing business.

Both pretty darn expensive, for sure, but I don’t see the inconsistency. I guess it depends whether or not you believe the 31% guidance or whether you believe they’re sandbagging massively?


Both pretty darn expensive, for sure, but I don’t see the inconsistency. I guess it depends whether or not you believe the 31% guidance or whether you believe they’re sandbagging massively?

I did read the last earnings call looking for any hint that they could be sandbagging…didn’t seem like that to me but let me know if you see something otherwise:

For Q1, 2019, the large upfront billing in Q4 will provide a difficult sequential comparison. Excluding the effects of the $16.5 million from our Q4 Billings, we expect the sequential percentage decline in Q1, 2019 to be consistent to our previous Q4 to Q1 sequential declines. In the last two fiscal years, Billings declined approximately 25% from Q4 to Q1.

For fiscal 2019, we expect the Billings year-over-year growth rate to be lower than the revenue growth rate, with a difficult comparison in Q4, 2019. If we exclude this large upfront billing of $16.5 million, total Billings’ growth in fiscal 2019 would be comparable to the revenue growth, implying Billings of $320 million to $330 million for the year. We will not be updating this Billings commentary in the future.

For YTD stock performance:

ZS - near flat
SHOP - up 24%

Obviously, the bull case has been made for the new paradigm potential of ZS…but the growth numbers do not seem to be supporting rapid adoption…and yet, the valuation is still built in as though adoption is rapidly occuring.

ZS is a tough hold under that circumstance and considering the valuation and TA setup, in a general market pullback…leading into earnings Dec 4th.

Most stocks of late (TWLO being an exception) have been punished with decadent earnings…perhaps just general market sanguine…but the above makes ZS all the more exciting leading into that earnings announcement.

Maybe the market sentiment becomes more optimistic before Dec 4th…would certainly help longs IMO…the market already knows the 31% YoY growth guidance…likely explains why the stock is flat this year.


Even if they no longer include Billings going forward they explain how to calculate it. Change in deferred revenue plus revenue. So you should still be able to easily calculate Billings going forward if they provide deferred revenue.

The high Billings number is misleading. Excluding multi-year Billings, it would have still been around 60%.

They are still targeting 56% revenue growth in q1, hardly a slowdown. And higher than Shopify’s guidance.

So from what I get from this is deferred revenue and Billings can be misleading if single year and multi year deferred revenue is being mixed together. I’m sure there are cost savings going with multi-year deals. Perhaps their goal is to go after more of these deals in the future with larger enterprises, rendering Billings a useless indicator.


Ahh got it. Apologies.
I was focusing on Q1, where revenue guidance is 59 million (48% growth). I’m sure their intention with that guidance is to do a beat and rise, as is common practice now, so minimally I reckon 60 million (50% growth).

But I agree. If they don’t make 60million revenue in Q1 and raise end of year guidance above 31%, we’ll be in trouble. Incidentally, at 60 million, their TTM revenue is 210, giving a P/S at current prices of under 18. Not as expensive as 21 but likely still not warranted if long-term growth is 31%.

Incidentally, couple weeks ago I got a work email saying that we have procured Zscaler, an award-winning Security as a Service (Saas) cloud based platform which will provide us with the highest levels of internet security, protection and improved web browsing performance. The service also allows our staff to work securely from any location whilst using any internet connection

It’s just a pilot and I work for a national health service body. So I doubt Zscaler will be getting much from us. But the procurement came from nowhere and shows to me that Zscaler is reaching old, slow moving, archaic governmental bodies, not necessarily known for pioneering technological innovations.

I wonder if this was driven by the ransomware attack last year, that ground the NHS to a halt in some places. At least Zscaler will provide that protection now:

As with all these stocks, earnings are exciting times aren’t they!


Correction, 47% revenue growth forecast for this quarter.

58-59 vs 40 last year

Still, to me they are not seeing the slowdown in growth shop is seeing. Regarding new avenues for revenue growth with shop, they seem to be very preliminary in the process and they’re going to have to just to compare with these higher and higher comps. I held shop but their growth rates are coming down to similar rates of other companies out there not seeing a slowdown themselves.

Jeepers, statistics statistics statistics. They mean nothing in isolation.

The market opportunity to market cap is much greater for Zs now than it is for SHOP.

Zs revenue has much further to grow, and they will do so with much higher cash printing ability. Each new customer is practically a growing annuity for life. Figure that into your spreadsheet.

Projected revenues for the coming year is $250 by analysts and will probably be closer to $285 absent a slow down. That creates a far lower price to sale on enterprise value that is materially lower than the recent buyout of Mobileye and RedHat, as examples.

Zs is likely to continue similar growth through 2020 as well.

Will Zs end up broken on the floor yet another victim to a great idea that never made it into the mainstream and thus harming its investors? yes, that is quite possible.

More likely it will succeed. The issue is how well will it succeed. If you want to call it valued at 150000x trailing revenues go ahead. It is all equally that meaningless. What counts it what it will do. And no, it is not valued at 15000000000x its forward revenues.

To date it has held, throughout the worst of it all, to a $3.5 billion enterprise value floor. Why? Because that is a minimum buyout price - I figure anyways.

If the business falls apart, and so falls Zs, not only will those invested in Zs lose out, so will more than 50% insider ownership in the company.

The former CEO of Palo Alto quit Palo Alto, took 3 months off, and then joined Zs as its COO. That was in 2011 so old history. He still sits on the board and bought at least $5 million of the stock out of his own pocket.

SHOP and Zs have both been great for what they do. Neither is valued on last year’s revenues or this years revenues but on next year’s and next year’s and next year’s. They will go up and they will go down. Sideways quite a bit I wager.



You say “absent a slow down”, but it seems as if many large and mega cap companies are guiding for a slowdown next year. Apple, Amazon, Google, Texas Instruments, Qualcomm, Skyworks, Facebook all guide for a slow upcoming quarter. Could this also portend a slowdown for our SaaS stocks? If so, shouldn’t we factor a slowdown in as a rather likely event rather than a peripheral event?


Fwiw BenDubya,

I also work for the NHS in the UK and we use Zscaler in our Trust… Which is a pretty solid validation from a conservative customer.

I think they will accelerate up the S curve over the next few years.

I opened a starter position once I knew this, despite my valuation misgivings.

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If one thing slows down, likely most things slow down. How much, how little, or if any at all is TBD.

It may not be universally applicable, but one of Zs’s headline companies (an oil servicing company) had its business slowing down as oil prices were crashing and they needed ways to save money. One step they took was moving to Zscaler, which materially decreased their security IT expenses while increasing their security.

With the ZS story went the Office 365 from Microsoft. The same company ended up upgrading the office programs for all their employees while cutting IT costs materially at the same time.

Zs and Office 365 are not necessary together but they go hand in hand. If one slows down the other will slow down. Given that Office is a necessary tool of business and 365 saves money (at least as it is marketed for IT) it is arguable (but usually in the end the argument won’t hold up) that it will not slow down as it is part of the solution for cutting expenses in a slow down.

Further, security cannot be put off until later. The cost is way too high to have a slip.

Those are the countervailing arguments. Zs, I do not believe, guided in regard to a general slow down in their guidance. That did not appear to be the case at the time of their last earnings call. More than 50% of Zs’s business is international, so one cannot judge simply by how the American economy is doing either.

Presently the U.S. economy itself, as it relates to jobs, is doing much better than the stock market. But that is not unusual give that the stock market is considered a leading indicator and jobs a trailing indicator.



You jettisoned the former…as we walk into earnings on Dec 4th for ZS…care to explain what seems to be inconsistency in thought process?

No, I don’t care to. If you don’t like what I’m doing no one says you have to pay any attention to it.


Great reply Saul, so many times you have freely and willingly tried to explain(for those that truly listen) that sometimes money allocated elsewhere could have more benefits in a shorter period of time and the fact that we all make mistakes, some work, some don’t. Plus to never follow what you do and to complete your own course of action and therefore it’s not necessary to defend yourself in any shape or form.


Thanks Tinker, the reply is much appreciated.