Shareholders of Zscaler would probably like to forget the past six months even happened. The stock dropped 47.5% and now trades at $154.74. This may have investors wondering how to approach the situation.
Following the drawdown, is this a buying opportunity for ZS? Find out in our full research report, it’s free.
Why Are We Positive On Zscaler?
Pioneering the "zero trust" approach that has fundamentally changed enterprise network security, Zscaler (NASDAQ: ZS) provides a cloud-based security platform that connects users, devices, and applications securely without traditional network-based security hardware.
1. Billings Surge, Boosting Cash On Hand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Zscaler’s billings punched in at $819.8 million in Q4, and over the last four quarters, its year-on-year growth averaged 24.3%. This performance was fantastic, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth. 
2. Projected Revenue Growth Is Remarkable
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.
Over the next 12 months, sell-side analysts expect Zscaler’s revenue to rise by 20.9%. While this projection is below its 25.8% annualized growth rate for the past two years, it is commendable and implies the market is forecasting success for its products and services.
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Zscaler has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 29.1% over the last year, quite impressive for a software business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.
Final Judgment
These are just a few reasons why we think Zscaler is a high-quality business. After the recent drawdown, the stock trades at 6.7× forward price-to-sales (or $154.74 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free.
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