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Zscaler: More Troubles Ahead?

Mar. 04, 2020 9:30 AM ETZscaler, Inc. (ZS)PANW, NET15 Comments
Niki Schranz profile picture
Niki Schranz


  • Zscaler reported disappointing Q2 2020 numbers, growing revenue at only 36%, continuing the growth deceleration that started in Q4 2019.
  • Management is blaming sales execution issues for the slowdown and claims that they already made great progress fixing the problem.
  • This raises important questions: Is management telling investors the whole picture? Is there more to the problem? Could Zscaler be "stuck in the chasm"? Is competition striking back?
  • Research by McKinsey emphasizes the importance of maintaining high revenue growth for successful tech-companies: "Grow fast or die slow".
  • Zscaler's story is not broken yet but recent developments are alarming. Holding and buying shares require a bit of a leap of faith.

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Is The Investment Thesis Still Valid?

When I first wrote about Zscaler (NASDAQ:ZS) a bit more than a year ago I had a clear investment thesis:

Zscaler was seeing explosive and accelerating revenue growth while also showing great profit margin potential. At the same time, the company seemed to have major long-term tailwinds from its disruptive approach to cybersecurity. Their competitive advantage as a first mover and market leader indicated a very long runway of growth.

At the time of my article (in December 2018), Zscaler was trading around $40 a share and had just come out of a quarter (Q1 2019) growing revenue at 59%, billings at 55% and deferred revenue at 68%.

Subsequent quarters showed an acceleration of revenue growth to 65% (Q2 2019) and 61% (Q3 2019) which catapulted the shares to an all-time high around $88 a share in late July 2019.

Since then Zscaler was hit by a combination of broader market turbulences in the Cloud/SaaS-space (which has already abated but seems to be picking up steam again as I write this) and weakness in business performance. What started with the company admitting to lengthening sales cycles in Q4 2019, culminated in the recent Q2 2020 earnings report where the company reported year-on-year revenue growth of only 36% and billings growth of 18%.

This steep deceleration in top-line growth metrics needs further discussion. Should investors be patient and wait this out or move on?

Could There Be More To The Problem Than Management Makes Us Think?

If you read or listen to the opening statements of the recent conference call without knowing the numbers and their context you might

This article was written by

Niki Schranz profile picture
I am an individual investor from Europe. My investment decisions are based on fundamental analysis and long-term thinking. My goal is to find and invest in companies with the potential to yield high returns in the long term. I study earnings releases, conference calls, announcements, and basically everything I can find about the stocks I own. When I find the time, I like to write down some of my thoughts. My portfolio (as of December 2022): AAPL, AMZN, CRWD, DDOG, GOOG, MA, MDB, MNDY, NET, NFLX, OKTA, PYPL, SHOP, SNOW, UPST, ZM, ZS. My content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment decisions.

Analyst’s Disclosure: I am/we are long ZS, AYX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (15)

All- some of the reasons ZS sales are slowing;
Their product is no longer unique;
PANW and their Prisma platform is SASE.
Cato Networks product is very similar but with Secure SDWAN as part of their Stack. ZS Does not have SDWAN
Fortinet is good but still HW appliance based
But the biggest Enterprise Security Company in the world is rolling out a head to head product with ZS.
Cisco Umbrella SIG. check it out.
Cisco ‘s Security Biz is approx $4B If it was a stand alone business. It’s double PANW and dwarfs ZS.
Cisco has a massive installed base of Prem web proxies and older Firewalls. I am not on sales calls with ZS reps. But as 1 person posted above. In larger companies re- architecting the Security topology is a risky project. So the big companies are waiting to see what happens.
Now that CSCO has released Umbrella SIG as a migration play from their base of Prem based appliances - who is a CIO / CFO likely to go with to redo their Security and mobile user Security Stack?
the market will give the answers over the next 2-3 quarters.
This is a great piece and an honest assessment including the author's own mea culpe. Been on the sidelines on this one mainly because I see less risky investment alternatives (not necessarily in the same space).
I think some of the ZS deceleration can be ascribed to the lack of available proxy refresh cycles, that had been seen in prior years. For the last 3+ years, appliance-based SWG vendors (e.g., SYMC-Blue Coat, MFEE, CSCO, Websense) had their proxy business captured when up for refresh by ZS SWG cloud service (AKA 'digital transformation'). As this sugar rush wears off, seems ZS is now seeking new & differentiated growth engines, in the hyper-competitive SASE space.
Hi Niki,

Great article! I am following ZS, PANW and NET.

I do believe that ZS has issues and they are putting all of their eggs in one basket, which is their CRO. Listening to the call is annoying and disturbing that the success of the company relies on 1 guy. I think is ridiculous that their CEO is not acknowledging competition, which they have from NET and PANW. It is also arrogant, NET has more POPs and better and faster network than them.

PANW is struggling with their product line growth but their cloud based offering which is SASE and which is very similar to ZS products is growing rapidly. Same for NET. If you listen to all of these 3 companies earning calls you will get an idea that NET is the company that is outperforming and not having anything to drag them down. Furthermore I think NET is taking away from FSLY on their Edge computing market.

I believe that NET is a pure winner and my biggest cyber security play. They do not have hardware exposure, unlike PANW and have a wide area of products they can push.
Niki Schranz profile picture
@jims11 Hi Jim! Thanks for the nice comment. I find NET very intriguing. I haven't had the time to take a deep dive but certainly looks like a promising company and investment. Best, Niki
You are welcome. Another benefit of NET is that they are not exposed to supply issues and COVID-19. I am a bit concerned that some of the plays like PANW, FTNT, etc - will be impacted by COVID-19 either due to supply chain issues or companies slowing down their refresh cycles or simply lack of resources for implementation. I know for instance that SD WAN integrations are usually outsourced to 3rd parties.
@author "I thought that Zscaler had a competitive advantage through its 100 data centers around the globe - a clear scale advantage in my view that seemed hard to replicate. Well, it turns out Cloudflare has 200 of these data centers."

And AKAM (also in this space, bigger, profitable, with many more customers) has 4000 data centers around the globe, all of which can be employed to fight a variety of security threats, including DDOS attacks.
Value Digger profile picture
First, ZS experiences material deceleration, based on its latest quarterly reports.

Second, at $52 per share, ZS has serious scalability problems and records significant losses every quarter with no end in sight while trading more than 15 times its revenue, so it's one of the bubbles in the technology sector.

Third, the fierce competition in the cybersecurity sector is getting fiercer and ZS is NOT immune to this.

Specifically, more than 300 cybersecurity startups are launched every year according to Momentum Cyber, a top advisory firm from the cybersecurity sector, as shown below:


Many investors remain in denial and I fear that they will learn the hard way.
There are many startups in the IT field in general and a lot of them fold or never become dominant. This is not a really serious argument.

ZS has definitely unique tech and infrastructure and entry point for new players is almost impossible, they are mostly being challenged by existing security plays like PANW and NET.

What security plays do you recommend and why, outside valuation concerns?
Value Digger profile picture

Me and my team like Fortinet (FTNT) and NortonLifeLock (NLOK).

We will gladly provide you with our insights about FTNT and NLOK if you join our research below:


2-week free trial is ON. Good luck with your investments.
Hi VD,

Thanks! I do like Fortinet as a pure perimeter play, a bit concern about their focus on SD WAN long term wise. Will check your service as well.

If there’s one thing I’ve learned the hard way in my career, it’s that selling to the C-suite is incredibly difficult. Pipelines are NOT a good tool to predict success here. Your pipeline can be very well filled. First indication is that it takes longer to sell. In reality, this often is a euphemism for your sales staff talking to the wrong people at customer end. You’re simply not reaching the decision maker, so while it looks like this sale just takes longer, the Reality often is that you’ve lost the sale already, you just don’t know it because your customer contact can’t get internal buy-in from c-suite, but won’t admit he is not the decision maker. Barking up the wrong tree, as it were. Good sales people at least recognise/admit that, lousy ones don’t. Guess which type is more common...
Niki Schranz profile picture
@les2005 Hey Les, thanks for the comment! Very helpful! So how do you rate Zscalers' chances to reaccelerate? Of course, it's an impossible question. How should anyone know? But I would be interested in your gut feeling nevertheless. Thanks, Niki
I'm afraid I really don't have any solid understanding/knowledge of Zscaler. I decided to sell and wait on the sidelines for new management to turn the ship. It just seems to me there is no point in holding on and hoping for improvement, when other companies are firing on all cylinders. It's always tempting to wait until hopefully ZS turns around/recovers - but it's been my expensive experience over the years that it rarely pays off.
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