ZS no longer a Saul stock?

Revenue growth y/y of 36.3%

Does this still belong in our 70% growth cohort?


At the turn of every month, Saul offers a review of his portfolio, with instructive commentary on the companies. This is his most recent. You can find these every month. In previous months, I have also observed commentaries on various moves he has made near when he made them. Good reads all.



We discussed more details on my forum, but the conclusion from this earnings is not difficult, it was a disaster. The rhetoric of the CEO is disconnected from reality. The business is not gaining momentum. It is like Nutanix, sales expenses growing while total new sales falling.

Reality does not equal narrative. Not even close. This is broken as a premier growth business. They are clearly having tremendous difficulty adding new customers. It is no more difficult than that.



What is your forum Tinker?

Here is a link to the Quarterly Report. https://ir.zscaler.com/node/8276/pdf

I agree. It looks a mess. I have a small position, but will likely exit tomorrow before all profit from the position evaporates.

Zscaler (ZS -14%) is z-scaling sharply lower today after reporting disappointing Q2 (Jan) earnings/guidance last night. This cybersecurity company saw its stock recover after a huge sell-off in September but this report is making investors nervous again.

Let’s take a quick look at the highlights:
The Q2 (Jan) results were actually pretty good as there was nice upside to analyst expectations for both EPS and revenue. The problem was that the guidance for Q3 (Apr) was mixed with EPS coming in below analyst expectations while revenue guidance was slightly above. Non-GAAP operating margin declined to 11% from 13% in the prior year period.

Demand does not seem to be the problem as sales in Q2 and the guidance for Q3 were both better than expected. The issue is on the cost side. ZS has been spending money to improve its offering and beef up its sales team. That helps explain why margins declined in Q2. The downside EPS guidance suggests this is going to continue affect margins in Q3 as well.

While ZS is feeling near-term pain, there will be a benefit later this year as ZS expects to launch four new product offerings in early fiscal Q4 (Jul), around May or early June. Zscaler B2B and Zscaler Digital Experience (ZDX) are two of these new product lines and they are getting great initial feedback from beta customers. ZS believes these new product lines will significantly expand its already large market opportunity. In addition, ZS has been developing new AI-based tools to provide visibility into leading indicators such as sales activities and other metrics.

ZS is investing in its business which probably makes sense long term. The problem is that this is weighing on margins and EPS in the near term. Based on the stock reaction today, investors were surprised to see Q3 still get affected to the degree it has been. Investors were hoping that the spending was going to subside by now.

The new products ZS is coming out with sound encouraging.


The new products ZS is coming out with sound encouraging.

I’m not sure it sounds encouraging.

I would be more encouraged if ZS wasn’t demonstrating a real struggle to add new customers.

Tinker has pointed out that the Top Down sales movement of ZS is fundamentally different than many of the bottom up sales movements of other stocks such as AYX.

I realized how true that is! Think about it, you have to basically evangelize a shift to ZS from top brass. That can take quite a long time!

So new products, to me, end up targeted at existing customers. The existing customer Net Expansion Rate was a low 116%.

ZS is in a bit of stall mode right now. I’m on the bench but not completely out basically due to all the market trends in their favor with cloud and security.

But it is no longer a leading position.

Just a Fool


Sold half last year and AH last night. The biggest lesson I learnt from Saul. Can’t speculate in tomorrow and if the story changes and I believe it has(as in not firing on all cylinders) move on and no matter what happens don’t look back.


I guess I must be finally learning something too.
I sold the rest of my position last night after I saw a continued deceleration in its growth rate

I am posting for the contrarian side of this debate; meaning I am going to hold onto my Zscaler; sit tight through this storm and see if the skies clear up or if this is another indicator of more bad weather on the horizon.

Zscaler currently represents 1.11% of my portfolio. I have taken 6 positions in Zscaler from early August '19 ($71.34/share) to late September '19 ($47.53).

As I type; Zscaler is down 18.09% for the day and my blended position remains up a paltry 10.06%.

This is an exercise in prudence. I am working hard to protect myself from myself. My brain is triggering “flight” mode and is telling me to “sell-sell-sell!!”. On the other hand, my investor brain is telling me to focus on the long term and not be swayed by the volatility of the market on a daily basis. My mantra is “investor temperament”…“investor temperament”…

I have now become Dali Rajic’s biggest cheerleader! Don’t know the guy, never met him and wouldn’t recognize him if he showed up at my house. But, if this Chief Revenue Officer “slash” Go-To-Market President is going to have a significant impact, it certainly wasn’t going to show up in his first quarter of employment with a new company. He probably hasn’t even unpacked the pictures of his family for the credenza yet.

So, while I understand the frustration and the willingness of other board members to pull the ripcord on this Rajic Sales experiment, I am going to try an experiment of my own and elect to stay with Zscaler and see if my loyalty is rewarded in the future.

P.S. Keep in mind, the whole time I typed this board post; my brain continue to torment me with the “sell-sell-sell” chant.


Are you buying more? If the answer is “Hell no” then waiting around for a turn around is probably not a good idea.


Nevada…I understand your comment, but its simply a difference in investing styles. Had I taken your advice in Dec. '18, I may have also sold NVDA at $136. Instead, I held on, “hoping” that the crypto glitch would fade. Here I sit today, up 115% from that point. Only time will tell if I am making the right choice with Zscaler.


I already lost one bet on ZS. After they hired their new CRO I thought we’d see a turn around by now. We didn’t see anything dramatic and their guidance is worse. I closed my position this morning.

Looking for the lesson in this. I know that I have a bias for great technology. That’s the main thing that kept me on board. The other thing that played a role in my sticking it out with ZS is that in general I have an irrational reluctance to selling. I had already sold half my position in late October of last year. But I still retained a fairly large position.

IMO, Zscaler has unbeatable technology. My opinion has not changed. So this stands as a glaring example of how the promise of great technology can be thwarted by the market. Have I over-reacted? I’m sure some folks will feel that I have. They might be right, revenue was not really the primary problem, it’s what they have to spend to generate the revenue. I’m unwilling to sit on this stock any longer waiting to see if and when they demonstrate a high rate of growth along with improving margins. To be quite honest, I think eventually they will turn it around. I just think there’s better investments for the next 3 - 4 quarters if not longer. I don’t believe the introduction of new products will have an immediate, impressive effect on their finances. I will hold up Twilio as an example. Many of us believed that their new product introductions were going to lift their revenues through the roof. Didn’t work out that way.

Saul often asserts he’s not a techie and he therefore relies on what others say about the technology. He’s a numbers guy who learns enough about the technology to feel comfortable, but it doesn’t drive his decisions. I’ll be curious to see his reaction. For me the lesson is the same one Saul has been trying to teach us all along - pay attention to the numbers, even when the executives try to pretty them up, they are what they are and they don’t lie.

I need to remind myself that companies don’t buy technology, they buy solutions to problems. Companies generally don’t make their purchasing decisions based on acquisition cost, they look for lifetime value, the return when evaluated against the total cost of ownership (“lifetime” where I worked was five years which I think is the IRS standard depreciation schedule for software).

Security products are unusually difficult to evaluate. The problem Zscaler solves is related to the risk of a cyber intrusion. How do you measure risk reduction, much less put a price tag on it? Every company of significant size (which are Zscaler’s potential customers) already have a security apparatus in place. Zscaler will be evaluated based on an estimate that shows their solution will measurably reduce the the threat threshold more effectively than whatever is currently in place and that it will provide greater value while doing so. The next thing to bear in mind is that a large percentage of intrusions are not the result of breaching the technical protections. Social engineering and other tactics that don’t rely on circumventing the technical security measures are the source of numerous intrusions.

I now have the problem of what to do with the money. With this sale, I’m down to eight positions. AYX is already way big, so I won’t add to it, leaving me with seven possible positions to add to, or start a new one altogether. A little bit ago I bought into ROKU, but I didn’t hang on to it. That will certainly be worth another look.


The very fact that the name of one man is the key to salvation of the company speaks for itself.

The other is that in a world where the general market category of mobile security is taking off with huge demand from SD-WAN to simply mobile security with the likes of Zoom leading the way for mobile work force, Zscaler, disruptor to this market, is now growing much slower than this market.

It is a 3 to 4 quarter turnaround. But think about it, a disruptive company with just more than $300 million in trailing sales has to “restructure” itself as if it were General Electric or something to make a turnaround. Young, fast growing, disruptive companies have growing pains, but they do not have to restructure or become a turnaround for crying out loud. That is almost an oxymoron.

Zscaler has great stuff, unique technology, great cash flow potential, but it is not adding new customers at any rate near acceptable, and this despite having a small market penetration.

It is less than 2% of your port, so who cares. Just hold it. But why would one want to add here, given the time it will take to turn around, given the oxymoronic juxtaposition of that term applying to such a young disruptive market leading company, and the fact that its great solution (which may very well be the best solution out there) may not be the best product out there to solve the problems that large enterprises are trying to solve. Seems as if they’d rather run inferior hybrid solutions. Best tech does not always win.

And what is it that will cause the market to change so that Zscaler can get across the chasm and start gaining new customers again in the hundreds per quarter? I can think of only one thing, and that is 5G becoming mainstream. 5G will multiply the bandwidth demands of enterprises. Zscaler almost uniquely is capable of securing enterprises with such large bandwidth demands. As if stands now most enterprises are something like 1-2 gb/sec. If you look at Zscaler’s sales, they have multiple sales with companies needing 10x or more that bandwidth to secure. Zscaler secures it when others cannot. So there is that.

Maybe it is just me, but I don’t want to invest in Dali, nor invest in a company whose competitive advantage is reliant upon the sales force being restructured instead of pushing through with growing pains as their product is in so much demand to begin with that it is fulfillment of services to meet the demand that is their problem.

So no, Zscaler is not dead, there is hope. However, if you define an investment in Zscaler vs. other companies, you cannot define a specific reason why Zscaler should start to become a dominant disruptive company. All you can come up with is that things will get better, and they are…oh oh, cheap! It will be on my grave stone (made of Marble and diamond) “he never bought cheap” LOL.

No, Zscaler is not cheap yet either. Last time Zscaler was cheap is when I bought hordes of it, they were still extremely overvalued and yet to the watchful eye they were outrageously cheap at the time. They are not cheap now.

So have some patience. Look at what happened to Nvidia (that had a clear path to recovery with multiple S curve tornadoes to go), or even Nutanix. They will not bounce overnight. But more than this Zscaler can no longer be called a category killer. Why invest in less than that? I’m sure many reasons, but I don’t want to hear them myself.



“After they hired their new CRO I thought we’d see a turn around by now. We didn’t see anything dramatic and their guidance is worse. I closed my position this morning.”


This was part of my point that I was making in my post about hanging on to Zscaler. I want to give the sales effort a chance to prove out. Do you really think you should “see a turn around by now”?

Dali Rajic’s hiring was announced September 10, 2019. Zscaler’s Q2 closed January 21, 2020. That’s one quarter reported with Rajic’s employed at the company. I find it hard to believe that a new hire can come on board and perform a turnaround of the sales team in 120 days.



I would say we are seeing a turn around. Based on their CC they’re doing extensive training for all sales people. The 1’s who have already gone through their new training have a better record of selling their services along with upselling. Ultimately, hes changing the way they do their sales. Buying into stocks is a long term game, not a quarter game. Then its gambling instead of investing.


I paid attention to the numbers. I sold my remaining 3.2% Zscaler position and added to Alteryx (great results and great future), Datadog (ditto), Crowd (beaten down) and Zoom (which is profiting like mad from the coronavirus situation, and after enterprises get used to meetings by Zoom, they probably won’t want to pay for airplanes and hotels for meetings).

By the way, most big companies will stick with microsoft for now, but if 70% go to Teams, and Zoom just gets 30% of the market, it won’t budge the needle for Microsoft, but it will be huge for Zoom. And as we recently read, Microsoft and Zoom have made Teams and Zoom interoperable (sort of saying “Let’s split up the market between the two of us.”).


70% go to Teams, and Zoom just gets 30% of the market,

You forgot the leader: WebEx (Cisco).

And a little company named Google has their G suite that competes against O365/Teams.

When larger enterprises have tools provided practically for free as part of a larger solution, they dont opt for best-of-breed if all they need is “good enough”.

Have Microsoft O365 w full security suite thanks to your EA or CSP? Then windows defender ATP negates need for CRWD and Azure AD (active directory) negates need (and added cost) for Okta.

Unless/until Zoom becomes more than they are today, i just dont see the TAM to justify the current almost $30b mkt cap, let alone growth beyond it. Perhaps SMB can get them there…SHOP has certainly thrived in that space.

No more stock trading fees and suddenly you have a ton of traders out there riding momentum stocks until momentum stalls, then they bail.

Look up SentinelOne as a potential CRWD-killer. Just completed funding round putting them at unicorn status with likely ipo in under 12 months. Apparently growing faster at this stage than crwd was.

Point is…these stocks are darlings until they arent, and aside from AYX, shelf lives seem short in terms of stock appreciation after a certain point. (See twlo, zs) Either growth rates taper from godly to just good or they are disrupted.

Slack was supposed to be a monster and got derailed before their public stock barely even traded.

Good luck out there to ZM holders. You may hit $40b mkt cap and then when the traders stop making money it may retrace to under $15b.



I want to give the sales effort a chance to prove out.

That’s what I thought and held a good portion of ZS until yesterday. I think it depends on your investing horizon, the younger you are the longer you can afford to wait. But the wait may not pan out as expected. I decided to sell all since like Saul I feel my money is better invested with the proven winners, AYX, DDOG, ZM and probably CRWD.

When I first invested in ZM I made a note of the high insider ownership. I probably should have paid more attention to it when ZS execution started to stumble way back in 2019. The Fool has always recommended to look at inside ownership and considered a 20% inside ownership as a good mix. If you look at the S1s filings, about 60% is held by Chaudhry, his family-associated trusts as well as executives and directors. A December 2019 evaluation by Morningstar shows an even higher percentage insider ownership.

With such a high insider ownership, outside influence on strategic or operational decisions is minimal and may explain why they obviously fell asleep at the wheel when it should have become clear that a more aggressive sales approach was warranted.

Time will tell if they will recover but they have opened an opportunity for the legacy companies Cisco, Palo Alto and Checkpoint, all more mature with larger installed bases and substantially more resources to not only fight aggressively against this shift to cloud but also to add software-based and cloud-delivered solutions to their offerings.

Zscaler, despite its unique cloud-based platform, may stagger down the slope like Nutanix, now at $36.97 and may eventually be acquired (despite Chaudhry’s protestation he’d never sell ZS like he did his other SW companies) or they may recover over the next several quarters but in my view for a young company in a highly competitive field it’s all about execution, execution, execution.

Good luck to all who still hold it.

I. M.


Skype and WebEx were products that companies adopted fairly widely because “well I guess we need a video conferencing solution”. For occasional use. Adopt and fade.

Not so with Zoom. Zoom is transformative. Ushering in a new era of communication. For routine use. Adopt and Zoom.

Skype to Teams seems a decision to continue along option 1 strategy. I believe most will come along to 2 at some point. The video to Teams is just repurposed Skype, including the infrastructure data centers. Not everyone has to get in the pool at once.

But I count on some FUD knocking it back down again. Coronavirus gains a little over done the other way. My position built mostly in low 60s ran up to over 13%. $108 Stop Lost took out half. I’ll be patient buying back.



My vote is for Zoom to get more than 30%:

From the OKTA Businesses at work report 2020.

OKTA’s Office 365 customers, % that use Zoom:

2016 8%
2017 15%
2018 24 %
2019 32%

Up 4x in 3 years.

I would bet the % that use Zoom is much higher for non Office 365 customers.

(I know this doesn’t mean the entire company is ONLY using Zoom.)