Zscaler, Inc. (NASDAQ:ZS) Not Flying Under The Radar

Zscaler, Inc.'s (NASDAQ:ZS) price-to-sales (or "P/S") ratio of 20x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.6x and even P/S below 1.9x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Zscaler

What Does Zscaler's Recent Performance Look Like?

Zscaler certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Zscaler will help you uncover what's on the horizon.

How Is Zscaler's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Zscaler's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 45% gain to the company's top line. Pleasingly, revenue has also lifted 266% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 26% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 17% per year, which is noticeably less attractive.

In light of this, it's understandable that Zscaler's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into Zscaler shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Zscaler.

If you're unsure about the strength of Zscaler's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.