Stock Analysis & Valuation Zscaler, Inc. (ZS)

• Previous Close: $200.12
• Sector Valuation Confidence Level: Low

Valuation method	Value, $	Upside, %
Artificial intelligence (AI)	191.13	-4
Intrinsic value (DCF)	412.53	106
Graham-Dodd Method	7.60	-96
Graham Formula		n/a

Strategic Investment Analysis

Company Overview

Zscaler, Inc. (NASDAQ: ZS) is a global leader in cloud security, providing cutting-edge solutions to secure digital transformation for enterprises. The company's Zero Trust Exchange platform enables secure access to applications, data, and services regardless of location, replacing traditional VPNs and firewall-based security. Zscaler's flagship products include Zscaler Internet Access (ZIA) for secure web and SaaS access, Zscaler Private Access (ZPA) for private application access, and Zscaler Digital Experience for monitoring user experience. Serving industries like financial services, healthcare, and technology, Zscaler operates on a cloud-native architecture that scales seamlessly with customer needs. As organizations increasingly adopt cloud and hybrid work models, Zscaler's platform is well-positioned to address growing cybersecurity demands. With headquarters in San Jose, California, the company continues to innovate in the $150+ billion cybersecurity market, competing against legacy security vendors with its modern, cloud-first approach.

Investment Summary

Zscaler presents an attractive growth opportunity in the expanding cloud security market, with strong revenue growth (FY2023 revenue of $1.6 billion, up 48% YoY) and improving operating margins. The company benefits from secular trends toward cloud adoption, Zero Trust architectures, and hybrid work environments. However, investors should note the company's current lack of profitability (net loss of $202 million in FY2023) and high valuation multiples. Competitive pressures from established security vendors and newer cloud-native competitors could impact growth. The company's strong cash position ($1.4 billion) and positive operating cash flow ($494 million in FY2023) provide financial flexibility for continued R&D investment and potential acquisitions. Zscaler's technology leadership in Zero Trust network access and cloud security posture management positions it well for long-term growth, but execution risks remain as the market becomes increasingly crowded.

Competitive Analysis

Zscaler maintains a strong competitive position as a first-mover in cloud-native security services, with several distinct advantages. Its Zero Trust Exchange platform processes over 240 billion transactions daily across 150+ data centers globally, creating significant network effects. The company's cloud architecture provides scalability and performance advantages over traditional appliance-based competitors, with lower operational complexity for customers. Zscaler's focus on Zero Trust principles aligns with modern security requirements better than legacy perimeter-based approaches. However, the company faces intensifying competition across its product lines. In secure web gateways, it competes with both legacy players (Palo Alto, Cisco) and cloud-native alternatives (Netskope). In private access, challengers like Cloudflare and Akamai are gaining traction. Zscaler's differentiation comes from its integrated platform approach, combining multiple security functions in a single cloud service. The company's large installed base (40% of Fortune 500 customers) and high dollar-based net retention rate (125%) demonstrate strong customer stickiness. Going forward, Zscaler must continue to innovate in areas like AI-driven security and workload protection while expanding its enterprise footprint to maintain leadership in the rapidly evolving cloud security market.

Major Competitors

• Palo Alto Networks (PANW): Palo Alto offers competing Prisma Access cloud security platform with broader firewall and endpoint security capabilities. Strengths include strong enterprise relationships and comprehensive security portfolio. Weaknesses include legacy appliance business and more complex hybrid architecture compared to Zscaler's pure-cloud approach.
• Cloudflare (NET): Cloudflare provides overlapping Zero Trust and secure access services through its global network. Strengths include massive network scale and competitive pricing. Weaknesses include less focus on enterprise security use cases compared to Zscaler's specialized approach.
• Cisco Systems (CSCO): Cisco offers competing Umbrella cloud security platform along with traditional network security products. Strengths include extensive channel partnerships and installed base. Weaknesses include slower innovation pace and hybrid cloud/on-premise solutions that lack Zscaler's cloud-native simplicity.
• Check Point Software (CHKP): Check Point provides cloud security through Harmony Connect, competing with Zscaler's ZIA. Strengths include strong security reputation and profitability. Weaknesses include late cloud transition and less comprehensive Zero Trust implementation.
• Fortinet (FTNT): Fortinet offers SASE capabilities through FortiSASE, leveraging its strength in network security. Strengths include integrated security fabric and competitive pricing. Weaknesses include less cloud-native architecture and weaker SaaS security capabilities compared to Zscaler.
• Okta (OKTA): Okta competes in identity-focused Zero Trust components while partnering in other areas. Strengths include leading identity management position. Weaknesses include lack of full network security capabilities that Zscaler provides.