I really appreciate @MajorFool20 pointing out the MELI opportunity, and so in turn I’ll mention Zscaler. Though the stock is down 24% ytd for no good reasons that I can surmise, to a market cap of just $27b, look how steadily they’ve grown non-gaap EPS the last 8 quarters:
I got back in over a month ago, but the additional haircut the last couple weeks inspired me to bump the position higher.
Valuation-wise, ZS’s trailing PE is 66.4, lower than MELI’s! (But to be clear this is very apples to oranges, because ZS’s “E” is non-GAAP and MELI’s is GAAP.) But ZS’s (non-GAAP) net margin is a lot higher, about 21% by my calculation. So their PE is a lot closer to their FCF multiple, 54. Therefore, it’s unlikely ZS’s profit margin will double in short order, but I still think it can expand some, and rapidly growing revenue will be a multiplier, so I see the above chart continuing.
So while MELI’s profit expansion could be more explosive, you’re still getting expansion with Zscaler, and I think with fewer risks. They’re a subscription software business and that will always give me a lot of confidence in the model. And while cybersecurity companies (other than CRWD) aren’t really cool right now, Zscaler is a leader in their space. They’re clearly not trading at anywhere near the premium of CRWD or other leaders (where ZS has traded in the past), so to me this looks like quite a no-brainer right now.
I’ve increased my position over the past couple weeks, but it’s still sub-10%. I’d like to know why in the world the stock is down 24% ytd. There is of course a chance that the growth will slow faster than I expect and the above chart still continues/increases but less and less so, and soon begins to flatten/plateau. I don’t expect that, but I’m not at the point where I want to put 15% or 20% of my eggs in this basket, and probably never would be.
If others have thoughts on Zscaler please add them.
I have total faith in ZS and have been adding, started way too soon. It reminds me of when the stock slowly tanked to the 80s last year. I kept buying all the way down and my cost basis was great, until I nearly doubled my position since their last ER, which was stellar. I believe the tank is based on nothing, but if I were to hazard a guess why:
The not-yet-public Netskope is rating higher on Gartner in the same space
PANW is moving up the charts on Gartner in the Zero Trust arena. So is NET
PANW saying they were going to start giving away product for free as they move to platformitization (that the word? platformation? Platypustulization?), making everyone worried about a price war that could affect all companies in the space.
I think people forget about the close relationship ZS has with the best name in the field, CRWD. But all in all, this looks very similar to what happened last year when it plummeted on no news. I wish I started adding now, instead of right after Earnings. But I’m in complete agreement with Bear, like I usually am. This seems like an opportunity to me.
I think much of ZS’s recent issues have been billings related. Management constantly harps on this metric as its best measure of health, yet guided for a 7% sequential decline for Q3. While a seasonal Q3 decline is normal, 7% is more than double the average of the last four years. It also implies a roughly 55% sequential Q4 jump, which in turn would be the highest in five years.
Management was asked point blank about this discrepancy on the call and reiterated they are comfortable with that breakdown. However, they are also doing this with a lot of recent C-suite shuffling including a revamp of the sales group and departure of the COO. Long-time holders will remember ZS experienced something similar in 2019 or so, and it did take a few quarters to turn it around (ironically led by the COO who just departed).
If management indeed hits those numbers, a buy here should look great. If not, this haircut will end up being justified. Even given CEO Jay Chaudrhry’s stable track record, ZScaler has left itself something to prove. We’ll see.
In the QnA at GTC, I heard Jensen Huang say that Nvidia has ZeroTrust in all their Data Centers! I asked Grok about this and this is what I received back as an answer:
NVIDIA has developed its own Zero Trust platform, which combines three technologies: NVIDIA BlueField DPUs, NVIDIA DOCA, and the NVIDIA Morpheus cybersecurity AI framework. This platform is designed to bring the power of accelerated computing and deep learning to continuously monitor and detect threats, and isolates applications from infrastructure to limit lateral breaches, at speeds up to 600x faster than servers without NVIDIA acceleration. This infrastructure aims to keep users and data safe, while maintaining a seamless user experience. The NVIDIA Zero Trust platform is a result of NVIDIA’s efforts to enhance security in data centers by leveraging its expertise in accelerated computing and AI technologies.
Hopefully, someone here with some technical chops can break down what this means for Zscaler.
I’m not very knowledgeable in this space, but I think it’s interesting to note that both $NVDA and $NET have their own ZT solution.
$NET went so far as to launch its “Descaler” program in early 2023, aiming to lure customers away from $ZS and claiming/touting a quick and simple easy migration path.
That makes me wonder if ZT is on a faster path towards commoditization than other cyber-security components,. OTOH, there is evidence against this notion in that to this point $CRWD and $S are partnering with $ZS, not competing against them.
As tangential a side-note, I also think it’s interesting that $CRWD and $S are also both partnering with $OKTA, which to my knowledge enjoys a dominant position in its cyber-security niche (Identity/Access Management, assignment and enforcement of multi-factor permissions at various component-layers, even as granular as at the individual file level).
Don’t get me wrong. I think they’ll do better than -7% in Q3. But even at the usual -3% or so ZS would need to add ~$270M in net new Q4 billings versus last year’s record $237M. Every percentage point below -3% would require an extra $12M or so in net new Q4 billings.
It’s very possible significant Q4 federal spending is coming now that the US Executive Order from a couple years ago is hitting the contract stage. However, any softness in Q3 would leave a heavy lift in Q4.
I’m still strong in ZS but don’t want to delude myself on what they need to do even if management didn’t hesitate to reaffirm the numbers when asked directly about it.
This is a recent note from a Barclarys survey. They found positive spending checks for SASE and greater interest in ZS, which made the bank “feel more bullish on ZS …”
On April 16, ZS announced a partnership with a large real estate company (GLP). GLP has 72 offices in 17 countries.
There have been a couple of positive articles on SA recently about ZS:
The second article is from Bert Hochfeld of tickertarget. He rated ZS as a “strong buy” and recommended buying the shares back on March 12 at $200/share (now they’re about $169). Bert thinks the following are some positives: (1) ZS TAM is growing “by having more data and applications to protect as AI applications are deployed,” (2) he believes ZS is a “share gainer vis-a-vis legacy competitors,” and (3) he thinks analysts overreacted to the seasonal dip in billings (which happens every year to ZS). Bert has a quote from the CFO about the guide being “prudent” and also some quotes from the CEO about the “robust” demand for ZS’s products. ZS’s CEO also said they “added a record number of new logos for our Q2.” New logo adds are a good sign for future growth, imho.
