Zero Trust Expansion Will Attract New Customers And Upselling Opportunities

Key Takeaways

• Zscaler's innovative Zero Trust architecture and strategic partnerships drive upsell opportunities, boosting revenue and enhancing customer retention.
  
• Focus on data protection and replacing legacy systems positions Zscaler for continued growth in the security solutions market.
  
• Macroeconomic uncertainty and scrutiny on large deals may impact revenue growth, while new product strategies could pressure margins and earnings stability.

Catalysts

Operates as a cloud security company worldwide.

• Zscaler's go-to-market improvements, including increased sales productivity and double-digit growth in new and upsell business, are expected to drive revenue growth, helping the company potentially achieve $3 billion in annual recurring revenue (ARR) by the end of the fiscal year.
  
• The strategic expansion of Zscaler's Zero Trust architecture, particularly the introduction of their Zero Trust Everywhere and Zero Trust Branch solutions, is attracting new logo customers and driving upsell opportunities, which should positively impact both revenue and net retention rates by increasing overall customer spend.
  
• The ongoing hardware refresh cycle presents an opportunity for Zscaler to replace legacy security systems such as firewalls and VPNs with their Zero Trust solutions. This is expected to drive revenue growth as organizations seek to reduce costs and complexity while enhancing security.
  
• Zscaler's focus on data protection, driven by factors such as the increasing adoption of Gen AI, positions them to capitalize on the demand for comprehensive data security solutions. This area has seen over 40% year-over-year growth in net new annual contract value (ACV), which should enhance future revenue and margins due to the higher value of these solutions.
  
• Strategic partnerships with global system integrators (GSIs) are facilitating the closing of large deals and embedding Zscaler into network and security transformation projects, which is expected to sustain or increase billings and revenue growth.

Zscaler Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zscaler's revenue will grow by 21.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.6% today to 2.6% in 3 years time.
• Analysts expect earnings to reach $111.6 million (and earnings per share of $1.29) by about April 2028, up from $-15.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $257 million in earnings, and the most bearish expecting $-195 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 436.4x on those 2028 earnings, up from -2021.3x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 2.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Zscaler Future Earnings Per Share Growth

Risks

• There is ongoing macroeconomic uncertainty and scrutiny on large deals which could potentially affect future revenues, especially if these factors persist or worsen.
  
• The financial outlook and guidance indicate potential variability in dollar-based net retention rate due to efforts in selling bigger bundles and faster upsells, which could impact future earnings consistency.
  
• Introduced new products that are optimized for faster go-to-market rather than margins could influence gross margins negatively over time, potentially affecting net margins.
  
• Large deal scrutiny remains a concern, and with IT budgets being tight, particularly for cybersecurity investment, this could impact the ability to close deals promptly, affecting revenue forecasts.
  
• There are significant dependencies on successfully executing penetrations and upselling within existing large customer accounts; failure to do so can lead to underperformance against financial guidance for revenue growth.

Valuation

• The analysts have a consensus price target of $236.395 for Zscaler based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $270.0, and the most bearish reporting a price target of just $195.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $111.6 million, and it would be trading on a PE ratio of 436.4x, assuming you use a discount rate of 7.7%.
• Given the current share price of $202.87, the analyst price target of $236.39 is 14.2% 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.