Is Zscaler the Cloud Security Stock of the Future?

In the world of protecting computers, smartphones, datacenters, and enterprises, the common theme seems to be “newer, different and better.” Zscaler, Inc. (NASDAQ: ZS) has been an overwhelming win. Its 2018 initial public offering price of $16 was gobbled up by investors. Despite pricing above the $13 to $15 price range, the lowest this stock has traded in 2018 was $24.76 and the current share price of $37.25.

With a Thomson Reuters consensus analyst target price of $37.90 and a post-IPO high of $43.98, some investors and analysts believe Zscaler can go higher. With a $4.45 billion market cap, many investors will want to keep in mind that Zscaler reportedly turned down a $2 billion buyout bid from Cisco Systems Inc. (NASDAQ: CSCO) just before its IPO.

A fresh report from FBN Securities is signaling that Zscaler could go much higher. FBN initiated coverage with an Outperform rating and assigned a $45 price target. That price target is $7 higher than the consensus analyst target and matches the street-high target.

According to FBN, and to other prior very positive post-IPO reports, Zscaler is a leader in the burgeoning cloud security market. The firm sees a total addressable market (TAM) of about $17.7 billion as of 2018. That figure is versus expected consensus 2018 revenues of $185 million. The FBN report cites that TAM as follows (approximate dollars):

  • secure web gateways ($2.5 billion);
  • firewalls ($11.5 billion);
  • data loss prevention ($1 billion);
  • and others.

With a subscription and support sales model, most of Zscaler’s business comes from its Zscaler Internet Access solution. Still, the company sees it moving customers toward the Transformation bundle as its highest-end solution and that this could reach 50% of the unit’s business in 3 to 4 years.

FBN analyst Shebly Seyrafi said:

We believe that the company has very strong visibility. For example, the company ended last quarter with a remaining performance obligation (RPO, which is basically the sum of billed and unbilled deferred revenue) of $305 million of which 54% is expected to be recognized over the next twelve months.  Therefore, approximately $165 million is already “in the bag”, and this represents approximately 70% of our estimated next twelve months revenue.

Additional positives from FBN were noted below:

  • Recent channel checks are positive;
  • Unique, user-centric (vs. network-centric) approach to security;
  • Strong position in Gartner’s Magic Quadrant for secure web gateways;
  • The cloud is growing rapidly, but it introduces security challenges that Zscaler can address.
  • Upsell potential.

As far as revenue expectations, FBN sees revenues of $184.8 million in 2018, followed by $246.3 million in 2019 and $318.8 million in 2020.

Zscaler ended up 1.8% at $37.25 on Tuesday, versus a post-IPO trading range of $24.76 to $43.98. Its Thomson Reuters consensus analyst target price is $37.90.

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