BTIG Downgrades Zscaler On Valuation, Says Company Is Redefining Cybersecurity Market

Zscaler, Inc. ZS shares are exhibiting balanced near-term risk-reward after a "successful" IPO earlier this year, according to BTIG.

The Analyst

BTIG analyst Joel P. Fishbein Jr. downgraded Zscaler from Buy to Neutral.

The Thesis

Zscaler shares have risen over 60 percent since the company’s IPO and 10 percent since the fourth-quarter print last week, Fishbein said in the Monday downgrade note. (See his track record here.) 

The analyst said he's moving to the sidelines in anticipation of a better entry point, adding that Zscaler will be a leading vendor in next-generation cybersecurity. 

Zscaler is redefining the $100-billion security market and disrupting a broken cybersecurity model, Fishbein said

“[The fourth quarter of 2018] closed on a strong note with deals sizing upward and becoming more strategic, evidenced by an enterprise ARR mix now sitting in the low $300,000 range," the analyst said. "Zscaler is seeing great traction with its transformational bundles, with transformational deals now representing 35 percent of ARR, up from 20 percent at the time of the IPO." 

Security valuations are generally sky high, and Zscaler is no exception, Fishbein said.

“High barriers to entry, [a] first-mover advantage and the potential to disrupt several large security markets open up a multiyear path to sustained growth. Yet, with shares currently trading at 16.9x our FY20E base case revenue estimate, we feel that risk-reward is balanced." 

Price Action

Zscaler shares were down 0.76 percent at $45.70 at the time of publication Monday afternoon. 

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