AI-Powered Zero Trust Exchange Platform Will Accelerate Revenue And Margin Growth

Key Takeaways

• Expansion in AI solutions and strategic customer deals position Zscaler for increased market share and improved net margins.
  
• Growing public sector and federal contracts drive potential stable, high-growth revenue and earnings.
  
• Economic uncertainties, competitive pressures, and leadership changes could challenge Zscaler's market position, revenue growth, and financial stability.

Catalysts

Operates as a cloud security company worldwide.

• Zscaler's strong bookings growth of over 30% and revenue growth driven by customer commitments to their Zero Trust Exchange platform and expanding AI solutions indicate significant potential for future revenue increase as the cybersecurity market evolves.
  
• The company's advancements in AI-powered cybersecurity and data protection solutions present opportunities for differentiated offerings and large customer wins, suggesting future expansions in market share and potential for increased net margins with high-margin AI offerings.
  
• Increasing customer adoption of Zscaler's AI-powered solutions, like ZDX Copilot, for operational efficiency and secure AI application usage provides opportunities for upsells and cross-sells, which could positively impact earnings through higher average contract values.
  
• Strategic shifts to a cloud-first architecture by large enterprises, as demonstrated by significant customer deals, position Zscaler to capitalize on ongoing digital transformation trends, likely boosting revenue and customer base.
  
• Expansion in public sector opportunities and federal contracts, fueled by the government's move toward zero trust architecture, could provide a stable, high-growth revenue stream, improving long-term earnings potential.

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 -1.6% today to 1.5% in 3 years time.
• Analysts expect earnings to reach $59.5 million (and earnings per share of $0.75) by about December 2027, up from $-36.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $198 million in earnings, and the most bearish expecting $-244.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 368.1x on those 2027 earnings, up from -847.9x today. This future PE is greater than the current PE for the US Software industry at 42.0x.
• Analysts expect the number of shares outstanding to decline by 19.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Zscaler Future Earnings Per Share Growth

Risks

• The company's reliance on forward-looking statements, which are subject to risks and uncertainties beyond their control, could negatively impact their ability to accurately forecast future revenue, operating performance, and net income.
  
• Despite strong growth, the competitive environment in cybersecurity, particularly in replacing legacy firewall vendors, presents a risk that could impede Zscaler's ability to maintain its market share, potentially impacting future revenues.
  
• The integration of new Emerging Products, which are growing faster but are currently optimized for faster go-to-market rather than gross margins, might pressure overall margins if not effectively managed and scaled.
  
• The mention of ongoing customer scrutiny of large deals in the context of economic conditions could indicate that economic uncertainties impact customer decision-making, potentially affecting Zscaler’s revenue and profitability growth trajectory.
  
• The retirement of the Chief Financial Officer, Remo Canessa, introduces potential transitional risks in financial strategy execution, which could impact financial decision-making and stability as a new successor steps into the role.

Valuation

• The analysts have a consensus price target of $226.15 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 $180.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.1 billion, earnings will come to $59.5 million, and it would be trading on a PE ratio of 368.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $200.45, the analyst's price target of $226.15 is 11.4% 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.