Examining Zscaler (ZS) could show us if Mr. Market is right about cloud-computing stocks.
To explain, Zscaler Inc. (NSASDAQ: ZS) claims to operate: “The world’s largest security platform built for the cloud.” In particular, Zscaler claims its platform processes 120 billion transactions a day, detects 100 million threats a day, and performs 175,000 unique security updates each day.
Zscaler’s customers include: Siemens AG (OTCMKTS: SIEGY), General Electric (GE), and Anheuser Busch Inbev NV (NYSE: BUD). Zsaler claims its platform serves four of the five top conglomerates, the five top household and personal care companies, three of the five top apparel companies, three of the five leading diversified insurance companies, four of the top five beverage makers, and two of the top five food retailers.
Coronavirus drives Zscaler’s Growth
Predictably, the coronavirus-driven switch to work-from-home is growing Zscaler’s growth.
For instance, Stockrow estimates Zscaler’s revenues grew by 46.2% in the quarter ending on 31 July 2020. In addition, Zscaler’s revenues grew by 39.68% in the quarter ending on 30 April 2020 and 36.29% in the quarter ending on 31 January 2020. Conversely, Zscaler’s revenues grew by 53.29% in the quarter ending on 31 July 2019.
Consequently, Zscaler’s quarterly revenues grew from $101.27 million on 31 January 2020 to $110.52 million in April and $125.89 million in July. Plus, Zscaler’s quarterly gross profit grew from $81.03 million on 31 January 2020 to $85.94 on 30 April 2020 to $94.53 million on 31 July 2020.
Zscaler (ZS) Loses Money
Zscaler is losing money despite its growth. Zscaler reported a quarterly operating loss of -$44.89 million on 31 July 2020.
That quarterly operating loss grew from -$20.51 million on 30 April 2020, but shrank from -$30.28 million on 31 January 2020. In comparison, Zscaler reported a quarterly operating loss of -$7.93 million on 31 July 2020.
Moreover, Zscaler began 2020 with a quarterly common net loss of -$29.15 million on 31 January 2020. The common quarterly net loss shrank to -$19.34 million on 30 April 2020 but grew to -$49.55 million on 31 July 2020.
How Much Cash does Zscaler (ZS) generate?
In 2020, Zscaler’s quarterly operating cash flow grew from $5.43 million on 31 January 2020 to $20.82 million on 30 April 2020. The quarterly operating cash flow grew to $31.64 million on 31 July 2020.
However, I think Zscaler (ZS) borrows enormous amounts of money. For example, Zscaler (ZS) reported a quarterly financing cash flow of $1.004 billion on 31 July 2020. The quarterly financing cash flow grew from $5.8 million on 30 April 2020 and $9.03 million on 31 January 2020.
I think Zscaler has not invested that cash in its operations because the company reported a quarterly ending cash flow of $17.26 million on July 31, 2020. The quarterly ending cash flow shrank from $48.06 million on 30 April 2020, but grew from $7.19 million on 31 January 2020.
Zscaler had $1.371 billion in cash and short-term investments on 31 July 2020. Zscaler’s cash and short-term investments grew from $391.31 million on 30 April 2020 and $384.91 million on 31 January 2020.
Zscaler (ZS) is a Risky Investment
I think Zscaler (NASDAQ: ZS) is a risky investment because it loses money and borrows cash to finance its expansion.
However, Zscaler offers a little value in the form of $1.833 billion in total assets. Impressively, Zscaler’s total assets grew from $735.96 million on 30 April 2020 and $676.42 million on 31 January 2020.
Mr. Market, however, cannot see the risk at Zscaler. For instance, Zscaler’s share value rose from $47.33 on 2 January 2020 to $140.46 on 29 September 2020 to $144.30 on 31 September 2020. Zscaler’s share price hit a high of $159.36 on 1 September 2020.
I think Mr. Market dangerously overprices ZS because the company reported revenues of only $101.27 million. Moreover, Zscaler pays no dividend.
I think demand for Zscaler’s cloud services is growing because work-from-home is booming. Notably, Global Work Place Analytics claims the number of Americans working remotely grew by 173% between 2005 and 2018.
Remote work is growing outside the United States too, Review 42 estimates. For instance, Gartner estimates 88% of the world’s organizations encouraged people to work from home during the pandemic. In addition, Gartner estimates 97% of organizations canceled all work-related travel.
Overall, 66% of the world’s companies offer some remote work, Owl Labs estimates. In addition, 52% of employees work remotely once a week and 68% work remotely once a month.
Meanwhile, the US Bureau of Labor Statistics estimates 57% of financial industry employees have the option to work-from-home.
Statista estimates 25% of respondent companies will move 10% of their employees to permanent remote-work status after the pandemic. Zscaler could profit from this trend because 67% organizations reported spending more on web conferencing software in April 2020.
Work-from-Home Will Continue
I believe Zscaler’s growth could continue because it appears work-from-home is here to stay.
For instance, 25% to 30% of workforce will work remotely by the end of 2021, Kate Lister of Global Workplace Analytics estimates. In addition, Review 42 claims 74% of companies plan to shit some employees to remote work.
Thus demand for secure cloud-based solutions employees can access from anywhere will grow. Businesses will need to offer such solutions because many professionals expect the ability to work from home.
In addition, managers fear authorities could close their offices for social-distancing. Organizations, however, need to stay in operation with no office. For example, a trucking company’s drivers will expect to get paid even if the human resources people are not in the office. Hence, somebody will need to prepare the payroll.
Zscaler (ZS) is a stock to watch
Likewise, organizations will need to keep paying the bills, ordering supplies and equipment, invoicing customers, borrowing money to finance operations, banking, balancing the books, and paying taxes in the pandemic. Plus, functions such as planning, marketing, hiring, advertising, ordering, design, and management need to continue when the office is closed.
Thus, every organization will need a secure cloud platform employees can use to perform basic functions such as payroll, billing, invoicing, and accounting from home. Zscaler (NASDAQ: ZS) could supply that platform.
Given that reality, I think investors need to watch Zscaler but not buy its stock. I predict Zscaler will experience dramatic growth for the foreseeable future, but make no money.