1 Magnificent Stock Down 57% to Buy During S&P 500 September Sale

The S&P 500 it generated a 15% return in the first half of this year, but recently hit a patch of volatility and is trading 3% below its July peak. The next couple of months could be tough to navigate with the Federal Reserve cutting interest rates and the US presidential election in November.

But history suggests that the S&P 500 always recovers to new long-term highs, so any subsequent selloff is likely a buying opportunity. Cybersecurity stocks could be a great place for investors as the threat landscape becomes more treacherous for businesses by the day, driving up sales for vendors that can offer the best protection.

Zscaler (ZS 3.26%) is one of them. Its stock is trading 57% below the all-time high it set during the tech frenzy of 2021, but here’s why it might be time to buy long-term.

A leader in cyber security with zero trust

Before the advent of cloud computing, a simple firewall would be enough to protect most companies from malicious actors, as most of their valuable data was often stored on local servers. But the cloud allows modern organizations to conduct all their operations online, so they can seamlessly reach a global customer base and hire employees from almost anywhere in the world.

This comes with significant risks, as it means businesses are vulnerable to attacks around the clock – and they could come from anywhere. The attack surface has become so large that traditional cybersecurity tools such as firewalls and virtual private networks (VPNs) are not enough on their own. Instead, Zscaler created the Zero Trust Exchange platform, which includes a suite of powerful tools for modern, cloud-based organizations.

It starts with identity security. Remote workers add a new level of vulnerability because managers can’t physically see them in the office, so it’s impossible for the organization to know if it’s really them connecting to the network or if their credentials have been compromised. Zscaler’s zero-trust identity security treats every login attempt as hostile, analyzing not only the employee’s username and password, but also their location and the device they’re using to confirm it’s really them.

In addition, Zscaler connects each employee to only the digital applications necessary for the workplace, so that even if an unauthorized user bypasses the identity security layer, they cannot access the rest of the network or compromise other assets.

Artificial intelligence (AI) is a key part of the Zscaler platform, as it can perform tasks such as identity verification in seconds. In addition, the company continues to release innovative new tools under its AI analytics umbrella, including Risk360, which proactively collects data from an organization’s digital environment to track risks. It then assigns a risk score to the business and recommends ways to mitigate potential vulnerabilities.

Zscaler says AI analytics is already driving additional sales, despite most products being less than a year old. The company’s AI software portfolio will continue to expand over time, thanks in particular to a new partnership with Nvidia. Zscaler will use the Nvidia AI Enterprise platform to deliver new solutions that will enable customers to deploy AI to achieve better security outcomes.

Image source: Getty Images.

Rapid revenue growth with improved profitability

Zscaler generated revenue of $2.167 billion in fiscal 2024, which was a 34% increase from fiscal 2023 and was also well above the company’s estimate of $2.141 billion — a number on who had squeezed him. three times throughout the year.

Zscaler expects to generate revenue of about $2.6 billion in fiscal 2025, which would represent a slower growth rate of 20%. This deceleration has been a constant theme in recent years. First, the bigger Zscaler gets, the harder it is to generate the same rapid growth of its previous years. Second, the company has been carefully managing its costs lately to improve its bottom line, and that means it’s spending less aggressively on growth-oriented initiatives like marketing.

During fiscal year 2024, Zscaler’s operating expenses increased by 21%. Because this was much slower than its revenue growth, the company was able to significantly reduce its generally accepted accounting principles (GAAP) net loss to just $57.7 million from $202.3 million in fiscal 2023.

On a non-GAAP (adjusted) basis, which excludes one-time and non-cash charges such as acquisitions and stock-based compensation, Zscaler generated a profit of $414.5 million, which was up 81% year-over-year last. Most analysts don’t consider this to be “true” profitability, but it’s a positive result when viewed in combination with Zscaler’s GAAP result, which is clearly in the right direction.

Why Zscaler Stock Is a Buy Right Now

Zscaler says there has been an 18% increase in ransomware attacks this year, and their success rate appears to be on the rise as there has also been a staggering 57% increase in the number of victims whose data has been leaked. As a result, businesses are likely to increase their spending on cybersecurity as time goes on.

Zscaler values ​​its addressable market at $96 billion, so it’s barely scratched the surface of its opportunity (based on the company’s current revenue). That’s a key reason to hold its stock for the long term, but another reason is that it’s relatively cheap.

As mentioned above, Zscaler stock is down 57% from its 2021 all-time high. It was undoubtedly overvalued at the time, but since the company’s revenue has grown significantly since then, the price-to-sales (P/S) the ratio dropped to 11.7. That’s significantly below its peak of around 70, but it also makes Zscaler much cheaper than other cybersecurity leaders like CrowdStrike and Palo Alto Networks:

PS report data by YCharts

CrowdStrike grew its revenue by 32% last quarter, and Palo Alto only grew its revenue by 12%. Remember, Zscaler has 34% growth in FY2024 (and 30% in the fourth quarter, specifically). CrowdStrike and Palo Alto are bigger companies than Zscaler, which means they will struggle to grow as quickly in the future (we’re already seeing this with Palo Alto). This makes it difficult to justify their premium valuations relative to Zscaler right now.

So based on Zscaler’s growth, its enormous addressable market, and its current valuation, now could be a great time to buy the stock.