Is Zscaler an Undervalued Cybersecurity Stock to Buy Right Now in October? | ZS Stock Analysis
Summary
Parkev provides a deep dive into Zscaler's growth prospects, highlighting management's ambitious goal of reaching $8 billion to $10 billion in annual recurring revenue (ARR) by 2031. This optimism is rooted in the rise of AI agents, which creates a significant tailwind for cybersecurity services. While Wall Street analysts project a more moderate revenue growth deceleration to around 16.2% by fiscal year 2029, Parkev emphasizes Zscaler's financial health, specifically its gross margins exceeding 80% and a free cash flow margin of 33.7%. Parkev views this as evidence of genuine organic demand rather than growth fueled by excessive marketing or discounting.
From a valuation perspective, Parkev notes that Zscaler is trading at a forward price-to-earnings (P/E) ratio of 38, which is at the lower end of its historical range. Parkev utilized a discounted cash flow (DCF) model to estimate a fair value of $203 per share. Although the current market price of roughly $213 is slightly higher, Parkev considers it fair and maintains a bullish stance. Parkev contrasts Zscaler with other cybersecurity firms like Palo Alto Networks and Fortinet, which Parkev recently downgraded due to valuation concerns, positioning Zscaler as one of the few remaining buy opportunities in the sector.
Mentioned Stocks
Reasoning: Parkev mentions downgrading Fortinet because the stock's valuation has become stretched following a broad sector rally. While Parkev previously considered it a buy for many years, Parkev now believes the current price does not offer a sufficient margin of safety. Parkev is shifting focus toward cybersecurity stocks like Zscaler that still trade at more favorable valuation multiples.
Reasoning: Parkev has recently downgraded Palo Alto Networks from a buy to a lower rating due to valuation concerns. Parkev explains that the stock has experienced a significant run-up in price, making it less attractive relative to its future growth potential. Parkev now prefers Zscaler as a more reasonably priced alternative within the cybersecurity industry.
Reasoning: Parkev identifies Zscaler as a high-quality growth stock with gross margins over 80% and significant organic demand driven by AI agents. Parkev calculates a DCF fair value of $203 per share, which is close to the current price of $213, suggesting a fair valuation. Parkev reiterates a buy recommendation, noting that the forward P/E of 38 is historically low and the company's ability to scale revenue to $10 billion by 2031 provides a strong long-term thesis.