For most enterprises, expanding their digital capabilities has become the main priority since the virus outbreak because the prospects of the business can depend on it to a large extent. That explains the rapid expansion of the customer base of cloud security firm Zscaler, Inc. (NASDAQ: ZS), even as the company reaps the benefits of its aggressive and continued investments in the key areas of the business.
The Silicon Valley-headquartered data security provider went public about three years ago and expanded its market value consistently since then, supported by a four-fold increase in stock price. With Zscaler’s growth being buoyed by the virus-driven spike in demand for cloud services, stock market watchers overwhelmingly recommend buying ZS. The stock looks poised for a strong rally this year, creating handsome returns for shareholders. But the valuation — in relation to sales — looks a bit too high, especially when compared to peers like Broadcom, Inc. (NASDAQ: AVGO) and Cisco Systems, Inc. (NASDAQ: CSCO).
The market’s response to the company’s innovative Zero Trust Exchange security service has been encouraging. Overall, demand conditions improved significantly last year as enterprises embraced digital transformation and shifted their workloads to the cloud. Recent cyberattacks that exposed the vulnerability of certain existing digital systems contributed to the high demand for cloud security services. Initially, there was apprehension about the sustainability of the current uptrend, in a market plagued by uncertainty, but Zscaler’s positive financial performance allayed those concerns.
From Zscaler’s Q2 2021 earnings conference call:
“With our Zero Trust Exchange, Zscaler provides secure any-to-any connectivity for users, applications, workloads, and IoT and OT systems regardless of your location. The recent SolarWinds security incident has further elevated the need for a true Zero Trust platform like Zscaler. During such sophisticated attacks, our proxy-based architecture would prevent loss of sensitive data and our application-level segmentation eliminates that whole set movement. We provide users access to applications, not the network, which is fundamentally different from firewalls and legacy network security architecture.”
The transformation the technology space is currently witnessing has changed the way people protect their digital assets, and security systems designed for new cloud-supported concepts like software-as-a-service and platform-as-a-service are emerging. Zscaler’s advanced and cost-effective solutions like Secure Access Service Edge network and Zero Trust Network Access give it an edge over rivals when it comes to serving the new cloud market.
Moreover, efforts are on to expand the product portfolio in line with changing requirements, to ensure safe app-to-app and cloud-to-cloud communication. Zscaler Cloud Protection, which was rolled out recently, extends on the Zero Trust Exchange.
Impressive Q2 Data
In the second quarter of 2021, the company’s key financial metrics came in above the consensus forecast. At $0.10 per share, adjusted earnings were unchanged from last year but revenues advanced 55% to $157 million, supported by a double-digit increase in billings. That prompted the management to issue strong third-quarter revenue guidance that beat the market’s projection.
Shares of Zscaler climbed to a record high in early February, ahead of the second-quarter earnings release, but soon entered a downward spiral and slipped to a four-month low last week. The stock traded slightly lower early Monday, after closing the last trading session on a positive note.
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