With a daily gain of 4.96%, and a 3-month gain of 6.32%, Zscaler Inc (ZS, Financial) has been generating buzz in the investment world. Despite a reported Loss Per Share of 1.41, the question arises: Is the stock significantly undervalued? This article aims to provide an in-depth valuation analysis of Zscaler, delving into its financial health, growth prospects, and intrinsic value. Let's dive in.
Unveiling Zscaler Inc (ZS, Financial)
Zscaler, a software-as-a-service (SaaS) firm, focuses on providing cloud-native cybersecurity solutions to primarily enterprise customers. The company's offerings can be broadly divided into Zscaler Internet Access, which provides secure access to external applications, and Zscaler Private Access, which provides secure access to internal applications. The firm, headquartered in San Jose, California, went public in 2018.
Despite a current stock price of $158.4, our proprietary GF Value estimates the fair value of Zscaler at $441.94, suggesting that the stock might be significantly undervalued. This analysis is based on the company's historical trading multiples, past performance, and future business performance estimates.
Decoding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated considering three factors: historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future estimates of business performance. The GF Value Line represents the ideal fair trading value of the stock.
According to our method, Zscaler (ZS, Financial) appears to be significantly undervalued. The stock's fair value is calculated based on historical multiples, an internal adjustment factor based on past business growth, and future business performance estimates. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns. Currently, Zscaler's stock price of $158.4 per share suggests significant undervaluation.
Given Zscaler's significant undervaluation, 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
Before investing in a company, it's crucial to evaluate its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Zscaler has a cash-to-debt ratio of 1.74, which is worse than 56.21% of 2752 companies in the Software industry. The overall financial strength of Zscaler is 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those demonstrating 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. However, 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 a Loss Per Share of $1.41. Its operating margin is -14.04%, ranking worse than 70.52% of 2785 companies in the Software industry. Overall, GuruFocus ranks Zscaler's profitability at 3 out of 10, indicating poor profitability.
Growth is probably one of the most important factors in the valuation of a company. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Zscaler's 3-year average revenue growth rate is better than 92.8% of 2415 companies in the Software industry. However, Zscaler's 3-year average EBITDA growth rate is -3.9%, ranking worse than 69.06% of 2007 companies in the Software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Zscaler's ROIC was -13.87, while its WACC came in at 9.29.
Conclusion
In summary, Zscaler's stock appears to be significantly undervalued. The company's financial condition is fair, but its profitability is poor. Its growth ranks worse than 69.06% of 2007 companies in the software industry. To learn more about Zscaler stock, you can check out its 30-Year Financials here.
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