▪ Initiate at Outperform with a $410 Price Target

 

We are initiating coverage on Zscaler with an Outperform rating and a price target of $410. 

 

What’s Our Call? As enterprises permanently shift to hybrid work environments and multi-cloud architectures, we believe organizations are increasingly looking to reimagine security architectures, a dynamic that we expect to culminate in robust near- and long-term growth. We believe Zscaler, as the flagbearer of cloud security with a differentiated architecture, is uniquely positioned to help drive transformational change toward Zero Trust security architectures, which will enable the company to deliver more durable growth than the consensus expects.

 

▪ Consensus Missing? A core debate around Zscaler has been whether its end markets are becoming saturated and if its market share is peaking. We believe Zscaler addresses a large, underpenetrated market opportunity protecting North/South traffic with ZIA and ZPA, and we view its expansion into protecting cloud workloads as a natural extension into East/West traffic.

 

▪What’s the Next Catalyst? Zscaler will report FQ1 results on December 1, 2021. What’s Valuation? Our 12-month price target of $410.00 equates to NTM and SNTM EV/ Revenue multiples of 61.7x and 45.0x, respectively, as compared with the current stock price of $349.07.

 

▪ What’s the Risk? Zscaler may face increased competitive pressure from large traditional security vendors as well as other cloud-native competitors, and end markets could become saturated with market share peaking. Additionally, with an expanding product portfolio, Zscaler may face longer sales cycles as customers’ evaluations of the company’s broadened capabilities require more time.