Zscaler: Positioned for Long-Term Growth and Market Leadership in SASE

Zscaler, Inc. (NASDAQ: ZS) stands out in the cybersecurity sector as a leader in the Secure Access Service Edge (SASE) market. Despite recent negative sentiment in the sector, Zscaler’s innovative approach and robust growth indicate a bright future. With annual recurring revenue surpassing $2 billion and an anticipated 29% CAGR for the SASE market, we project Zscaler to become a $100 billion company by 2030, with a five-year price target of $620.

Q2 2024 Performance and Guidance

1. Strong Q2 Results:
   • Revenue: $525 million, up 35% YoY.
   • Non-GAAP EPS: $0.76, beating expectations.
2. Full-Year Guidance:
   • Revenue: Projected between $2.118 billion and $2.122 billion, surpassing consensus.
   • Q3 Billings: Anticipated 7% decline due to seasonality, not a long-term concern.

Despite the strong results, the stock experienced a 30% decline post-earnings, influenced by broader sector sentiment and specific concerns about billings.

SASE Market Growth and Zscaler’s Position

1. Market Growth:
   • SASE Market: Expected to grow at a 29% CAGR, reaching $25 billion by 2027.
   • Drivers: Increased cloud service adoption, remote workforces, and AI-driven cyber threats.
2. Leadership and Innovation:
   • Market Recognition: Zscaler is consistently recognized as a leader by Gartner, IDC, and Forrester.
   • Zero-Trust Architecture: Pioneering the shift from traditional network security to a comprehensive Zero-Trust model.

Long-Term Growth Model

1. Revenue Projections:
   • 2024 Revenue: $2.12 billion.
   • 2030 Revenue: Projected to reach $9.75 billion, growing at a 28% CAGR.
2. Valuation:
   • Forward P/S Multiple: Declining from 13x to 10x as revenue growth moderates.
   • 2030 Price Target: $620, supported by strong revenue growth and market leadership.

Competitive Advantage and Market Strategy

1. Differentiated Strategy:
   • Integrated Platform: Unlike competitors offering point products, Zscaler provides a comprehensive SASE solution.
   • Innovation and Adaptability: Continual investment in new technologies and market expansion, especially in localized content for international markets.
2. CEO’s Vision:
   • Jay Chaudhry: Emphasizes the architectural shift and long-term advantage of Zscaler’s Zero-Trust foundation over traditional firewall solutions.

Risks and Considerations

1. Market Competition:
   • Aggressive Pricing: Competitors entering the SASE market may impact Zscaler’s pricing power.
2. Recent Security Concerns:
   • Data Breach Incident: A claimed breach in May 2024, later confirmed to be an isolated test environment, not affecting customers or production environments.

Conclusion

Zscaler is well-positioned for long-term growth, driven by its innovative SASE solutions and strong market presence. Despite short-term sector challenges, Zscaler’s differentiated strategy and robust revenue projections make it a compelling long-term investment. We maintain a long-term Buy rating with a five-year price target of $620, envisioning Zscaler as a $100 billion company by 2030.