ZScaler and Palo Alto Napkin Math Exercise

Just doing some quick napkin math on ZScaler and Palo Alto Networks, inspired by Saul’s post on valuation.

Palo Alto is currently growing revenue close to 30%. ZScaler is currently growing close to 60%. I’m assuming a five year growth rate of 50% for ZScaler and 20% for Palo Alto Networks. ZScaler gross margin is currently close to 80%, Palo Alto Networks is close to 70%.

Assuming margins stay the same, at these growth rates, ZScaler’s gross profit will increase 3.48x relative to Palo Alto.

Take Palo Alto’s current multiple of 6.97 and multiply it by 3.48, you get 24.24 as an equivalent P/S ratio for ZScaler.

ZScaler is currently trading at a P/S ratio of 23.92.

Make of this what you will. My 5 year revenue estimates should be taken with a heavy dose of salt. Also, it’s not as if five years from now is the endgame.