Cloud And AI Adoption Will Drive Long-Term Demand For Unified Security Platforms

Catalysts

About Netskope

Netskope provides a unified cloud based security, networking and analytics platform that protects and optimizes enterprise access to web, cloud, private applications and AI.

What are the underlying business or industry changes driving this perspective?

• Rapid enterprise adoption of cloud and AI workloads is expanding Netskope's addressable market, supporting sustained ARR growth above revenue growth and underpinning management's longer term revenue acceleration ambitions.
• Structural consolidation away from legacy appliances and first generation cloud security toward unified SASE and SSE platforms positions Netskope to capture larger multiproduct deals, which can lift average ARR per customer and support durable double digit NRR.
• Growing urgency to secure generative and agentic AI usage, including tools like Microsoft Copilot and other LLM services, should increase demand for Netskope's differentiated AI aware controls and data protections, creating a premium upsell mix that can benefit revenue and gross margin.
• Continued scale out of the NewEdge global private cloud network and related efficiency gains are driving higher gross margins today and are expected to support a path toward the 80 percent gross margin target and expanding operating margins over time.
• Ongoing investments in R&D and in ramping a larger enterprise focused salesforce, combined with strong partner ecosystems such as Microsoft and CrowdStrike, should translate into higher sales productivity, faster net new ARR growth and improving free cash flow generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Netskope's revenue will grow by 22.9% annually over the next 3 years.
• Analysts are not forecasting that Netskope will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Netskope's profit margin will increase from -105.8% to the average US Software industry of 12.4% in 3 years.
• If Netskope's profit margin were to converge on the industry average, you could expect earnings to reach $152.2 million (and earnings per share of $0.32) by about December 2028, up from $-699.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 111.0x on those 2028 earnings, up from -11.3x today. This future PE is greater than the current PE for the US Software industry at 32.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.74%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Netskope remains materially unprofitable with a negative 15 percent operating margin and is signaling that the path to sustainable positive free cash flow will not be linear. If investments in R&D and sales do not translate into sufficient incremental growth, investors could re-rate the stock lower due to persistently weak earnings and net margins.
• The business depends heavily on continued rapid cloud and AI adoption. A slowdown in enterprise IT spending or a cyclical pause in network security and SASE refresh cycles could reduce demand for new deployments and expansions, pressuring revenue growth and ARR trajectory.
• Competition in secure access service edge and secure service edge is intense, with hyperscalers and large incumbents also targeting AI security and data protection. If Netskope fails to maintain clear product differentiation or loses major bake-offs, pricing pressure and slower multiproduct adoption could weigh on revenue and gross margin.
• The long-term strategy assumes continued gross margin expansion from the NewEdge infrastructure toward an 80 percent target. If traffic growth, AI workloads or edge compute requirements drive higher than expected network and compute costs, gross margin improvements could stall and limit operating margin expansion.
• Share-based compensation and headcount growth, including aggressive hiring of quota-bearing reps and engineers, has already led to substantial dilution and a large GAAP net loss. If stock-based compensation does not normalize as expected or revenue per employee underperforms, earnings per share and shareholder returns could be negatively impacted.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $27.29 for Netskope based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $152.2 million, and it would be trading on a PE ratio of 111.0x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $20.04, the analyst price target of $27.29 is 26.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.