Zscaler Inc (ZS, Financial) has recently gained 3.51%, with a 7.45% increase over the past three months. Despite its Loss Per Share of 1.41, the stock appears significantly undervalued according to our valuation analysis. In this article, we will delve into the company's operations, financial health, and intrinsic value to answer the question: Is Zscaler (ZS) undervalued?
A Glimpse into Zscaler Inc (ZS, Financial)
Zscaler is a software-as-a-service (SaaS) firm that provides cloud-native cybersecurity solutions primarily to enterprise customers. The company's offerings are divided into Zscaler Internet Access, which provides secure access to external applications, and Zscaler Private Access, which ensures secure access to internal applications. Zscaler, headquartered in San Jose, California, went public in 2018.
With a current stock price of $161.05, Zscaler has a market cap of $23.70 billion. The company's sales amount to $1.60 billion, making it a significant player in the cybersecurity industry. However, the GF Value, our proprietary measure of the stock's intrinsic value, stands at $442.86, suggesting that the stock is significantly undervalued.
Understanding the GF Value
The GF Value is an exclusive measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
According to our valuation method, Zscaler (ZS, Financial) is significantly undervalued. This suggests that the long-term return of its stock is likely to be much higher than its business growth.
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Assessing Zscaler's Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Zscaler's cash-to-debt ratio stands at 1.74, ranking worse than 56.52% of 2721 companies in the Software industry. Overall, Zscaler's financial strength is fair, with a score of 5 out of 10.
Profitability and Growth of Zscaler
Investing in profitable companies carries less risk. This is especially true for companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Zscaler has been profitable for 0 years over the past 10 years. During the past 12 months, the company had revenues of $1.60 billion and a Loss Per Share of $1.41. Its operating margin of -14.04% is worse than 70.94% of 2756 companies in the Software industry. Overall, GuruFocus ranks Zscaler's profitability as poor.
Growth is probably the most important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Zscaler is 49.6%, which ranks better than 92.74% of 2397 companies in the Software industry. However, the 3-year average EBITDA growth rate is -3.9%, which ranks worse than 68.96% of 1988 companies in the Software industry.
ROIC vs WACC
Another way to assess the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the ROIC should be higher than the WACC. For the past 12 months, Zscaler's ROIC is -13.87, and its WACC is 9.37.
Conclusion
Overall, the stock of Zscaler (ZS, Financial) is estimated to be significantly undervalued. The company's financial condition is fair, and its profitability is poor. Its growth ranks worse than 68.96% of 1988 companies in the Software industry. To learn more about Zscaler stock, you can check out its 30-Year Financials here. To find high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
