Zscaler, a leader in network security, has seen a strong performance in its stock recently. However, the company is currently facing a soft demand environment, which poses increased downside risk. While Zscaler is well-positioned in the cybersecurity market, competition is intensifying, making it challenging to assess the long-term winners in the industry.
One area of concern for Zscaler is Data Loss Protection (DLP), which is gaining increased attention due to generative AI applications. Zscaler believes that its platform, which sits in line, already performs DLP to some extent. The company has been bolstering its DLP offering through acquisitions and leveraging AI technology to enhance its capabilities.
Zscaler’s focus on larger organizations and its government business provide some protection against market weakness. The Federal Government’s emphasis on a Zero Trust approach to security is driving larger deals with Zscaler’s government customers. However, Zscaler has been criticized for a lack of innovation compared to its competitors, including Fortinet, Netskope, Palo Alto Networks, and Cloudflare.
The company’s recent drop in Gartner’s SASE market assessment hasn’t deterred Zscaler, as it believes the assessment doesn’t reflect customers’ opinions. Zscaler’s bundled product offering, Zscaler for users, which includes ZIA, ZPA, and ZDX, has exceeded expectations and leverages the growing demand for consolidation in network security.
Zscaler has been highlighting its AI capabilities, introducing various AI-driven innovations such as Data Protection for AI, AITotal, and AI Visibility and Access Control. The company’s branch connectivity product addresses the specific needs of protecting different types of branches, using session-based encrypted tunnels and the Zero Trust Exchange.
Financially, Zscaler has experienced strong revenue growth, with ZPA product revenue showing significant year-over-year growth. While customer additions have slowed, expansion within the existing customer base presents an opportunity for growth. Gross profit margins have moderated, partly due to increased usage of public cloud services, but operating profit margins have improved due to optimization efforts.
Zscaler’s stock has benefited from its stable growth and improving margins, driven by investor risk appetite. However, the soft demand environment and stretched valuation pose challenges. While further upside potential exists, assessing the company’s future performance requires careful consideration of market dynamics and competition.
