The Nasdaq Composite index, a tech-focused stock index, has had an impressive run in 2023, surging by 32%. Several factors have contributed to this surge, including lower inflation rates, strong economic growth, reduced concerns of a recession, and the widespread adoption of artificial intelligence (AI) in the tech industry. These factors have provided a significant boost to technology stocks.
The Nasdaq’s upward trajectory is expected to continue, and one reason for this optimism is the potential Federal Reserve decision to lower the federal funds rate in the second quarter of 2024. This contrasts with 2022 when the Nasdaq plummeted by 34% as the Fed raised interest rates to combat inflation. The current outlook is more favorable.
Given this backdrop, investors may be wondering if now is a good time to consider investing in Zscaler (NASDAQ: ZS), a component of the Nasdaq Composite that has already achieved remarkable gains of 47% in 2023. Let’s delve into the reasons for this potential opportunity.
Zscaler’s Impressive Growth
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Zscaler recently reported its fiscal 2023 fourth-quarter results, which exceeded expectations in terms of growth. The cybersecurity company’s revenue increased by a remarkable 43% year over year, reaching $455 million. This surpasses the company’s original growth guidance, which ranged from 35% to 36%. Moreover, Zscaler’s adjusted earnings showed even more remarkable growth, surging by 156% in the last quarter to $0.64 per share, surpassing the projected $0.49 per share.
For the entire fiscal year, Zscaler achieved a 48% boost in revenue, totaling $1.6 billion. Its non-GAAP earnings soared from $0.69 per share in the previous year to $1.79 per share. This exceptional growth can be attributed to two key factors: an expanding customer base and increased spending by existing customers.
Zscaler concluded the last quarter with 7,700 customers, a notable increase from the 6,700 customers it had in the same period the prior year. Equally significant was the accelerated spending by its existing customers. For instance, the number of Zscaler customers with an annual recurring revenue (ARR) of $1 million or more surged by 37% year over year in the last quarter, totaling 449. Meanwhile, the number of customers generating at least $100,000 in ARR for the company increased by 25% year over year to 2,609.
This robust performance is reflected in Zscaler’s dollar-based net retention rate, which reached an impressive 121%. This metric compares the revenue generated by Zscaler’s customers in the previous quarter to the revenue generated by those same customers in the year-ago period. A reading above 100% indicates that Zscaler’s customers are either expanding their usage of its products or adopting more of its offerings.
Importantly, Zscaler managed to double its ARR to over $2 billion in just seven quarters, driven by an improving customer base and increased spending by existing customers. Additionally, the company has a solid revenue pipeline, with remaining performance obligations (RPO) totaling $3.5 billion at the end of the previous quarter.
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Zscaler’s Growth Potential
The RPO figure represents the future revenue that can be recognized from customer contracts yet to be fulfilled. Notably, Zscaler’s RPO significantly exceeds its fiscal 2024 revenue guidance of $2.06 billion, marking a 29% increase from fiscal 2023 levels. In simpler terms, Zscaler’s revenue pipeline is robust enough to support its top-line target this fiscal year. However, given the size of the RPO, the company might deliver even faster growth.
Furthermore, Zscaler is well-positioned to sustain its impressive growth in the long term, particularly considering the cybersecurity niches it serves.
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Investor Upside
Zscaler is a leader in the virtual network security market, boasting a 5% larger market share than its closest competitor, Akamai. The demand for virtual network security is steadily increasing, driven by the growing adoption of zero-trust security, a framework that requires user identity verification to access private network resources.
According to Precedence Research, the zero-trust security market is expected to generate $118 billion in annual revenue by 2032, a substantial increase from $25 billion in the previous year. With Zscaler’s expanding customer base and growing adoption of its offerings, the company is well-positioned to capitalize on this sizable market opportunity. Consequently, it is expected to achieve robust annual earnings growth of 60% over the next five years.
Considering Zscaler’s historical performance and its potential for continued growth, it is reasonable to anticipate that the company’s earnings could reach $18.77 per share in five years based on its fiscal 2023 earnings. Applying the Nasdaq-100’s average forward earnings multiple of 27, this could translate into a stock price of $506, suggesting the potential for the stock to at least triple in value over the next five years.
For investors seeking a long-term investment in the cybersecurity sector with substantial growth potential, Zscaler appears to be a compelling choice worth considering before its stock value climbs even higher.
