tiprankstipranks
Can Zscaler Scale Its Business Despite a Possible Downturn?
Stock Analysis & Ideas

Can Zscaler Scale Its Business Despite a Possible Downturn?

Story Highlights

Like most other companies in the technology space, macroeconomic headwinds are likely to weigh on Zscaler’s business growth. However, the company appears to have ample growth potential once the initial moderation in growth is over.

Zscaler (NASDAQ: ZS) is a next-generation cybersecurity company that serves a total addressable market worth approximately $23 billion.

The company recently held its yearly conference Zenith Live 2022, which was attended by several analysts from multiple research firms, among whom was BTIG analyst Gray Powell. “As always, ZS sounded upbeat on the potential to gain share and consolidate point solutions across multiple markets in security,” said Gray Powell, noting that the company is taking strong steps in new products like Cloud Posture Management.

It is not that the company is unaware of the possibility of a recession, but management feels that the risk should not stop their investments in growth initiatives, as they have “multiple levers that could be pulled in the event of a broader macro slow down.” Powell believes that Zscaler appears to be in a better position than its peers to tide over a downturn.

Importantly, the analyst acknowledged that despite the strong demand for cybersecurity products and services, macroeconomic headwinds are threatening to catch up and potentially prolong the sales cycles of Zscaler as well as its peers.

Nonetheless, this downturn might turn out to be a good opportunity for the company to gain market share. This is because in a downturn, customers will look for evidence of real return on investment, and Zscaler continues to be able to demonstrate real ROI by consolidating point solutions.

That said, Powell emphasized that he does not expect the company to grow and gain market share right away and expects growth to slow down in the forthcoming few quarters in response to the macro pressures before gaining traction. “We would expect to see some moderation in growth before things improve over the next 6 – 12 months,” he noted.

“In our opinion, it is probably too early in the downturn for ZS to see a slowdown in business today,” said Powell, explaining his reason for reiterating a Buy rating and a price target of $184 on the stock. He believes the long sales cycles and harder C-level scrutiny on deals might be a hindrance to near-term growth.

However, as customers are increasingly adopting cloud architectures and consolidating point solutions, Powell expects Zscaler to benefit over time.

Wall Street is also bullish on Zscaler, with a Strong Buy consensus rating based on 21 Buys and three Holds. The average Zscaler price target is $210.92, implying 24.9% upside potential.

The Bottom Line

Like most other companies in the technology space, macroeconomic headwinds are likely to weigh on Zscaler’s business growth. However, the company appears to have much growth potential once the initial moderation in growth is over.

Disclaimer

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles