Zscaler Is Massively Overpriced

While we see Zscaler’s technology as potentially disruptive, our long-standing view is that it is difficult for cyber security businesses to establish economic moats as "innovative" technologies seem to be mimicked by peers over time. Zscaler’s tangential competitors on the endpoint and firewall side, almost exist in a Hobbesian state of nature, where new technologies and price wars make the environment fiercely competitive, which compels us to maintain our no-moat rating for Zscaler at this time, but we concede that Zscaler is not susceptible to the refresh cycle replacement risks of those peers.

The firm reported solid revenue of $56 million for the quarter and $190 for the year, with billings growth of 54%. Guidance for fiscal 2019 sat at $255 million at the midpoint and we track modestly above that range. Thus, we have raised our fair value estimate to $35 dollars per share, giving Zscaler greater credit for deferred revenue growth and margin expansion.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.