When ZScaler started dropping a couple of weeks ago I added more. But I ended up selling it all yesterday before earnings. I feel relief today. But I’m not gloating. I could very well be feeling sellers remorse in a few years time. But as we should remind ourselves, emotion is something that we need to check when investing. I’d like to explain my thinking in my decision with ZScaler
Valuation of Alteryx and Zscaler is at relative parity. Both are growing around 60%. ZScaler has gross margins of around 80%. Alteryx has gross margins around 90%. Before Monday and Tuesday, both were valued at around 30 p/s. Now they are both closer to 20% with Alteryx slightly higher.
Alteryx has a greater TAM. While one should take TAM numbers with a grain of salt, it’s not insignificant that ZScaler identifies its current TAM at 13 billion while Alteryx described its market opportunity on Cramer the other day as being 26 billion.
Alteryx is in a better industry. Security is fraught with risk. Security companies are constantly defending against malicious actors trying to bring them down. That’s just the nature of the industry. It’s not to be expected that ZScaler will suffer a serious breach, but the climate is such that there will always be competing security products and companies are wise to create layers of defense. ZScaler was a first mover in cloud security, but Crowdstrike and other companies already have competing offerings. Not to knock Zscaler’s offerings, but security will always be an industry with many players. There is always an arms race. It is unlikely that ZScaler will ever have more than a fraction of the market.
Alteryx, on the other hand, believes that its market is winner takes all, and it probably is. Killer apps such as Photoshop and Excel push out all other challengers in their niche. Alteryx looks to be the killer app in the field of data science. There is a risk. They might not be the eventual winner, and in that case their business will eventually stall out and fail. But if they succeed, they will capture basically their entire market. Their current growth and pricing power shows they are on their way to that success. If the Alteryx thesis plays out, today’s prices will look VERY cheap. ZScaler, however, could still be a successful security company and never justify its current multiple.
This is my thinking on why Alteryx is the superior investment.
Here’s one reason why I might be wrong. I really don’t know how transformative ZPN is going to be. Could this technology become a fundamental element of web traffic? If so, ZScaler will become something truly special and one of the foundational technology companies of our generation. I’m not a tech person so I don’t know what the future for ZPN truly is. Therefore I need to consider ZScaler as a speculative investment and put ZScaler in my speculative basket instead of my growth basket.