Since May 2020, the S&P 500 has delivered a total return of 100%. But one standout stock has more than doubled the market - over the past five years, Zscaler has surged 228% to $253 per share. Its momentum hasn’t stopped as it’s also gained 25.9% in the last six months thanks to its solid quarterly results, beating the S&P by 25.2%.
Following the strength, is ZS a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Is Zscaler a Good Business?
After successfully selling all four of his previous cybersecurity companies, Jay Chaudhry's fifth venture, Zscaler (NASDAQ:ZS) offers software-as-a-service that helps companies securely connect to applications and networks in the cloud.
1. ARR Surges as Recurring Revenue Flows In
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Zscaler’s ARR punched in at $2.7 billion in Q4, and over the last four quarters, its year-on-year growth averaged 26.7%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Zscaler a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Projected Revenue Growth Is Remarkable
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.
Over the next 12 months, sell-side analysts expect Zscaler’s revenue to rise by 19.7%. While this projection is below its 41.2% annualized growth rate for the past three years, it is healthy and indicates the market is forecasting success for its products and services.
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Zscaler has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 28.7% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.
Final Judgment
These are just a few reasons why we think Zscaler is a high-quality business, and with its shares beating the market recently, the stock trades at 13.4× forward price-to-sales (or $253 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
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