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Zscaler Inc(ZS-Q)

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1 Spectacular Stock Down 45% You'll Regret Not Buying on the Dip

Motley Fool - Sat Mar 9, 5:29AM CST

Each year, global consulting firm PwC surveys thousands of CEOs to learn about the risks and opportunities their businesses face. The 2024 edition of the survey asked several questions about generative artificial intelligence (AI), and 64% of the 4,702 respondents said they were worried the technology would increase their cybersecurity risk going forward.

It was their top concern, outranking the spread of misinformation and potential reputational risks from the use of AI.

Cybersecurity giant Palo Alto Networks says there has been a tenfold increase in the number of phishing emails targeting businesses over the last 12 months, thanks in part to generative AI's ability to rapidly craft realistic content designed to trick employees into clicking malicious links. So the risk is real and it's already here.

As a result, advanced cybersecurity protection has never been more crucial. Zscaler (NASDAQ: ZS) is a top developer of zero-trust technology, which is designed to keep bad actors locked out of corporate networks. Its stock is down 45% from its all-time high right now. But here's why that presents a buying opportunity for investors.

Two people in an office looking at a computer monitor and discussing what is on it.

Image source: Getty Images.

A leader in zero-trust security

Zscaler's Zero Trust Exchange is designed to meet the needs of modern organizations. Traditional cybersecurity software and firewalls can't offer adequate production in a cloud-first world where businesses operate online as a priority. For example, remote workforces are becoming more common, and they create significant cyber vulnerabilities because organizations don't have physical oversight of those employees.

Zscaler's zero-trust technology treats all users as hostile. When a remote worker attempts to sign into their company's network, Zscaler analyzes not only their login details, but also the device they are using and their location to confirm it's really them. This is key -- managers can't physically see their employees, so there is no way to tell if their credentials have been stolen.

Plus, the Zero Trust Exchange only connects workers to the digital applications they need to complete their jobs. Therefore, even if a malicious actor mounts a successful breach, the rest of the organization's network is completely invisible to them. They can't move laterally to different applications or compromise other important assets.

Zscaler has over 7,700 customers, which includes 40% of the Fortune 500 companies. In the fiscal 2024 second quarter (ended Jan. 31), 2,820 of those customers were spending a minimum of $100,000 per year with Zscaler, which was a 21% year-over-year increase. Plus, 497 customers were spending at least $1 million, which was a 31% jump.

Those statistics prove how valuable Zscaler's zero-trust technology is becoming to large, complex organizations.

Zscaler's revenue growth is slowing, but there is more to the story

Zscaler generated a record-high $525 million in revenue during the second quarter, which was a 35% increase from the year-ago period. However, the company's revenue growth was 52% in that year-ago period, so it has gradually decelerated over the past four quarters.

Macroeconomic factors have played a role. Interest rates are at the highest level in two decades, so businesses are spending money more cautiously, even on critical cybersecurity tools.

However, Zscaler has also engineered the slowdown in its revenue growth by managing its own costs to focus on profitability. The company only increased its operating costs by 24% in the second quarter, and since revenue grew faster, more money flowed to the bottom line. As a result, its net loss came in at $28.5 million, which was a 50% reduction from the year-ago period. It's a departure from the growth-at-all-costs strategy companies like Zscaler have used prior to the rapid rise in interest rates in 2022.

Zscaler has big ambitions for the future

Despite the deceleration in Zscaler's revenue growth, its Q2 result was enough for management to slightly raise its fiscal 2024 full-year forecast to $2.12 billion, from $2.1 billion. The company's long-term goal is to more than double its annual recurring revenue to $5 billion, not only by acquiring new customers but also by focusing on helping existing customers expand their cybersecurity spending.

As I touched on earlier, new technologies like AI are making it easier for malicious actors to target corporate employees with sophisticated attacks. Zscaler's zero-trust technology operates on the front lines of that battle, ensuring harm is minimized even in the event of a successful breach.

Zscaler stock is down 45% from its all-time high, which was set during the tech frenzy in 2021. Its valuation was a little unrealistic back then, but the company has since gone from strength to strength despite what its stock price implies. Therefore, the steep discount might be a great chance for investors to buy in and hold for the long term.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks and Zscaler. The Motley Fool has a disclosure policy.

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