Zscaler (ZS), which made its IPO debut in March 2018, is breaking out to new all-time highs today. We wanted to put the name on your radar ahead of its upcoming Q3 (Apr) earnings report on May 30.
The company is a provider of cloud security. Its flagship services, Zscaler Internet Access and Zscaler Private Access, create fast, secure connections between users and applications, regardless of device, location, or network.
ZS makes the argument that the notion of "inside the network" or "outside the network" is disappearing. ZS believes the corporate network is changing to a direct-to-Internet architecture. Zscaler's cloud platform is replacing traditional network security appliances such as secure web gateways and branch firewalls.
The company has posted EPS upside in each of its four quarters as a public company. What stands out to us is that ZS has reported surprise profits each of the past two quarters when losses were expected. The revenue upside each quarter has been impressive as well.
So how is the company doing this? CEO Jay Chaudhry summed it up well when ZS reported JanQ results in late February, "We are seeing success in disrupting the traditional network security market, with a globally distributed cloud security platform that consistently applies policies and protections no matter the device or location. We are increasingly viewed as a strategic foundation to our customers' network and security transformation towards a cloud and mobile first world."
The proof is in the pudding as ZS has been posting huge revenue growth. In Q2 (Jan), revenue jumped 65% yr/yr to $74.3 mln and ZS guided to FY19 revenue of $289-291 mln, which represents growth of +52-53% over FY18. Perhaps even more importantly, ZS expects to be profitable on a full year basis for the first time in FY19. In addition, the balance sheet is rock solid with $340 mln in cash/investments, or $2.77 per share, with no long-term debt.
In sum, the company's impressive track record relative to consensus is probably what is pushing the stock price higher as we approach its next quarterly earnings report. Investors are hoping for another strong report in AprQ. The main drawback for the story is the valuation as ZS trades with a $9.4 bln market cap, which computes to a price/sales ratio of 32x, which is quite frothy.