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Zscaler Extends Gains as Cloud Security Demand Ramps Up

The stock price of cloud security company Zscaler Inc. (NASDAQ:ZS) skyrocketed more than 29% on Friday to trade at $98 per share following the company's latest earnings results.

Zscaler smashed analysts' expectations on revenue and earnings. Non-GAAP earnings of 7 cents per share outperformed Zacks consensus estimate of 2 cents and revenue beat forecasts by 3.85%.


The company provides internet access solutions to customers globally that connect them to externally managed applications such as SaaS. It also offers private access solutions to provide access to internally managed applications hosted in data centers or in private and public clouds.

Zscaler's products have witnessed a ramp-up in demand following the coronavirus pandemic as more businesses and institutions shift operations to remote networks. Chairman and CEO Jay Chaudhry said in a press release that "the mitigation activities taken by every enterprise in response to the COVID-19 pandemic created an immediate need for strong security and access to the internet and business applications, all while working from anywhere."

Highlights from the third-quarter results

For the quarter, Zscaler reported a 40% increase in revenue from the prior-year quarter to $110.5 million. Total billings for the period scaled 55% higher to $131.3 million, while non-GAAP net income came in at $9 million, or earnings of 7 earnings per share, up from $7.4 million, or 5 cents per share, last year.

The company's cash and cash equivalents as of April 30 stood at $391.3 million. This gives Zscaler the flexibility it needs amid the coronavirus pandemic.

It recently made some key acquisitions in a bid to strengthen its grip on the internet security business. In April, the San Jose, California-based company acquired Cloudneeti Corp., a cloud security posture management company specializing on SaaS, IaaS and PaaS applications.

In May, it acquired Edgewise Networks, one of the leading players in application-to-application communications security for public clouds and data centers. The company is strategically positioned to capitalize on the opportunity created by the rapid rise in remote working amid the coronavirus lockdown.

Zscaler expects to post earnings of 20 cents to 21 cents per share on revenue of $422 million to $424 million for full fiscal 2020. In the fourth quarter, earnings are expected to be 2 cents to 3 cents per share on $117 million to $119 million in sales.

Valuation

Froma valuation perspective, shares of Zscaler appear to be relatively expensive compared to its rivals. The company trades at a forward price-earnings ratio of 333 and a price-earnings to growth ratio (five-year expected) of 7.13. Its price-sales ratio of 26.68 is also relatively higher compared to its peers.

For instance, Palo Alto Networks Inc. (NYSE:PANW) is currently valued at a forward price-earnings ratio of 40.3. Its PEG ratio stands at 2.46, while the sales multiple is 6.86. On the other hand, Fortinet Inc. (NASDAQ:FTNT) trades at a forward price-earnings ratio of 49.51, a PEG ratio of 2.96 and a price-sales ratio of 10.64.

Overall, Zscaler's recent gains appear to have pushed the company's valuation multiples even higher. It remains to be seen whether there is more room for extended gains in the coming months. With demand for internet security ramping up, however,there could be an opportunity to capitalize, which could boost growth.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.