ZS

Zscaler continues to demonstrate strong momentum in the cloud security market, with its latest quarterly results showing revenue growth of 41% year-over-year and improved operating margins. The company has successfully transitioned from burning cash to generating positive free cash flow, with margins expanding to 18% in the most recent quarter. While still not GAAP profitable, Zscaler's non-GAAP profitability metrics have significantly improved, suggesting the company is successfully scaling its operations while maintaining disciplined spending.

The zero-trust security market remains robust, with enterprises accelerating their digital transformation initiatives and prioritizing cybersecurity spending. Zscaler's platform approach and strong position in Secure Service Edge (SSE) technology has helped it win larger enterprise contracts, with the number of customers spending over $1 million annually increasing by 34% in the latest quarter. Recent strategic partnerships with major cloud providers and the launch of their AI-powered security features have strengthened their competitive moat against traditional firewall vendors and emerging cloud security players.

Current valuation metrics remain elevated with a forward P/S ratio of 15x, reflecting high growth expectations. However, this premium is justified by Zscaler's market leadership position, improving unit economics, and large addressable market opportunity. Key risks include increasing competition from both legacy vendors and cloud-native security providers, potential cybersecurity incidents affecting reputation, and macroeconomic headwinds impacting enterprise IT spending.

Looking ahead 12 months, we expect Zscaler to maintain revenue growth above 35% while continuing to improve operating leverage. The consensus analyst target price of $375 represents approximately 25% upside from current levels, supported by expanding margins and sustained demand for zero-trust security solutions. The company's focus on large enterprise customers and high retention rates provides good visibility into future revenue streams.

RECOMMENDATION: BUY - While volatility may persist in the near term, Zscaler's strong market position, improving fundamentals, and critical role in enterprise digital transformation make it an attractive investment for growth-oriented portfolios with a medium to long-term horizon. Consider dollar-cost averaging to manage entry point risk given current market conditions.