Zscaler Inc (ZS, Financial) has recently seen a daily gain of 2.06% and a 3-month gain of 10.43%. However, it reported a Loss Per Share of 1.41. With these figures in mind, the question arises: is Zscaler's stock significantly undervalued? This article aims to provide an in-depth valuation analysis of Zscaler to answer this question. Read on to discover more about the company's financial strength, profitability, growth, and intrinsic value.
Company Introduction
Zscaler is a software-as-a-service (SaaS) firm focusing on providing cloud-native cybersecurity solutions to primarily enterprise customers. Its offerings can be broadly partitioned into Zscaler Internet Access, which provides secure access to external applications, and Zscaler Private Access, which provides secure access to internal applications. The firm is headquartered in San Jose, California, and went public in 2018. With a current stock price of $161.62 and a GF Value of $444.5, Zscaler's market cap stands at $23.60 billion, suggesting that the stock is significantly undervalued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
At its current price of $161.62 per share, Zscaler has a market cap of $23.60 billion and the stock is believed to be significantly undervalued. Because Zscaler is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Zscaler's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Zscaler has a cash-to-debt ratio of 1.74, which ranks worse than 56.85% of 2737 companies in the Software industry. Based on this, GuruFocus ranks Zscaler's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Zscaler has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $1.60 billion and Loss Per Share of $1.41. Its operating margin is -14.04%, which ranks worse than 70.08% of 2721 companies in the Software industry. Overall, GuruFocus ranks the profitability of Zscaler at 4 out of 10, which indicates poor profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Zscaler is 49.6%, which ranks better than 92.69% of 2394 companies in the Software industry. The 3-year average EBITDA growth is -3.9%, which ranks worse than 69.29% of 1993 companies in the Software industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Zscaler's return on invested capital is -13.87, and its cost of capital is 9.07.
Conclusion
In summary, the stock of Zscaler (ZS, Financial) is believed to be significantly undervalued. The company's financial condition is fair, and its profitability is poor. Its growth ranks worse than 69.29% of 1993 companies in the Software industry. To learn more about Zscaler stock, you can check out its 30-Year Financials here.
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