According to Cybersecurity Ventures, cybercrime will cost the global economy $9.5 trillion this year. Companies continue to shift more of their operations, sales channels, and valuable assets online using cloud computing, which makes them more vulnerable to attacks than ever before.
Generative artificial intelligence (AI) enhances the cyber threat even further by empowering malicious actors with the ability to create realistic email, video, and audio content to trick corporate employees into handing over sensitive information. PwC recently surveyed 4,702 CEOs and found that 64% were worried AI could increase their cybersecurity risk going forward.
One beneficiary of the shifting landscape is Zscaler (NASDAQ: ZS) because it’s a leader in zero trust and cloud cybersecurity. The company just reported its financial results for the fiscal 2024 third quarter (ended April 30), and they came in far better than expected, which sent its stock soaring 8.5%.
Zscaler stock remains 58% below its all-time high, which was set during the tech frenzy in 2021. But here’s why its recent recovery could continue.
The digital economy is a hotbed of opportunities, but it comes with risk
Thanks to technologies like cloud computing, businesses are no longer confined to their domestic markets. They can sell products to a global customer base, and they can hire remote workers no matter where in the world they’re located. This creates a wealth of new opportunities, but it also presents significant risks.
Workers who come into the office every day are easy to track because management can physically see them signing into the organization’s network. Remote workers, however, create a significant source of vulnerability because there’s no way to tell if a malicious actor has compromised their credentials.
Zscaler’s Zero Trust Exchange tackles that problem by going beyond the employee’s username and password to analyze other factors like the device they’re using and the location the sign-in attempt is coming from. Plus, employees can only access the digital applications required for their jobs, so even if a hacker bypasses the identity security layer, they can’t access the broader network or move laterally to infiltrate other assets.
AI powers that entire process, rapidly enforcing the organization’s security policy before allowing the user to establish a connection to any application. Zscaler’s AI models assess 500 trillion security signals every single day, so they get faster and more accurate at identifying threats over time.
More than 7,700 businesses around the world use Zscaler. During the fiscal third quarter, 2,922 of them were spending at least $100,000 annually on its cybersecurity tools, which marked a 20% increase from the year-ago period. Moreover, the number of customers spending at least $1 million increased 31% to 523.
Faster growth among higher-spending customer cohorts highlights how important Zscaler’s zero trust technology is becoming among larger, more complex organizations.
Zscaler smashed expectations in Q3
Zscaler generated $553 million in revenue last quarter, up 32% year over year and comfortably above management’s forecast of $535 million. The strong result prompted the company to raise its full-year revenue guidance to $2.14 billion (from $2.12 billion), which is one of the reasons investors sent Zscaler stock higher.
But another reason was the company’s profitability. Growing revenue at a fast pace is easy when a company ramps up its spending on line items like marketing, but Zscaler’s operating expenses only increased 15.6% for the quarter. Since its revenue grew twice as fast, more money flowed to the bottom line, which propelled the company’s net income to $19.1 million. That was a big swing from the $46 million net loss it generated in the year-ago period.
On a non-GAAP basis, which strips out one-off and non-cash expenses like stock-based compensation, Zscaler’s net income soared 86% year over year to $139.8 million.
Why Zscaler stock is a buy now
Zscaler stock peaked at around $377 during the tech frenzy in 2021, but the company’s valuation was a little irrational at that point — a phenomenon experienced by many growth stocks back then. As a result, it sank 75% to a low of around $90 in 2022, but it has since recovered and trades near $170 as of this writing.
That recovery might be set to continue. As I mentioned earlier, Zscaler is on track to generate $2.14 billion in revenue for fiscal 2024 (ending July 31), but the company has set a long-term goal to reach $5 billion in annual recurring revenue (ARR).
Plus, the company just proved it can maintain strong top-line growth while also delivering a profit, so it probably won’t have to burn truckloads of cash to reach its target. But it gets better: Zscaler says its addressable market in the cybersecurity industry could be worth $72 billion — and growing, thanks to continued innovation in areas like AI — so it has barely scratched the surface of its opportunity.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zscaler. The Motley Fool has a disclosure policy.
1 Super Stock Down 58% You’ll Regret Not Buying on the Dip was originally published by The Motley Fool
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