Zscaler Earnings and Projections

Our analysis shows Zscaler's strength - even as an independent company

UPDATE: Q3 more or less in line with our expectations. As expected, Zscaler is providing a prudent guide, we believe opportunity remains strong. We will create a separate article going into our methodology deeper in detail.

We are presenting an updated fundamental analysis of Zscaler on the day of its earnings announcement. Recognizing the need for clear insights following a series of inadequate reports by other analysts, our revision not only builds on an earlier analysis shared in a previous article but also enriches it significantly. Over the coming days, weeks, and months, we will further elaborate on this analysis and extend our examination to include Zscaler's competitors within the cloud security sector. In particular, we are hoping to teach our readers how to parse the numbers and ignore the comments. Our findings indicate increasing momentum for both Zscaler and the broader cloud security industry that is both strong as is secular.

Financial Performance

Zscaler's financial performance has been nothing short of astounding since its IPO in March 2018. In FY 2023, revenue skyrocketed to $1.09 billion, representing a remarkable 62% year-over-year growth rate. Despite its market capitalization retreating to around $27 billion from a peak of $51 billion in November 2021, Zscaler remains attractively valued within the frothy SaaS sector. It has consistently outperformed the "rule of 40" benchmark, which measures a software company's combined revenue growth and profitability rates.

While Zscaler is not yet GAAP net income profitable, its underlying unit economics are exceptionally strong. The company boasts a stellar gross margin over 80%, demonstrating its ability to scale revenues efficiently. Moreover, its free cash flow margin exceeds 20%, highlighting robust cash generation capability. These metrics signal that Zscaler could readily achieve GAAP profitability simply by moderating investment levels going forward.

Underappreciated Opportunities

Market has not fully understood “under-the-hood” changes underway and had a knee jerk reaction to Zscaler. We hope to correct these by noting two key areas in which market has missed its mark in understand the company and its fundamentals.