Cybersecurity is now critical as remote work, cloud use, and sophisticated threats grow, with phishing up nearly 30% globally and VPN attacks hitting over half of companies.

Zscaler (ZS) has led the shift to zero-trust security by verifying every user and device before granting access, using a cloud-native platform that scales more efficiently than legacy firewalls.

Its innovations like AI-driven threat detection and flexible purchasing with Z-Flex, have driven rapid adoption, yet many investors still view them as unprofitable based on as-reported accounting.

In reality, Zscaler has been profitable for a long time and improving margins, positioning it for continued growth in a market projected to double by 2030.

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Cybersecurity has become an essential part of doing business in today’s world.

With the rise of remote work, cloud adoption, and increasingly sophisticated threats, organizations need robust security solutions to protect their data and infrastructure.

Global phishing attempts increased by almost 30% in the last year, and phishing attempts that targeted the finance and insurance industry increased by 400%.

Furthermore, 56% of the companies reported having one or more VPN-related attacks in the past year. Also, IoT malware attacks increased by 100%.

The global cybersecurity market size was valued at $250 billion in 2024 and is projected to reach $500 billion in 2030, exhibiting a 13% CAGR.

Zscaler (ZS) has emerged as a dominant player in this critical market by pioneering a new approach to security called zero trust.

Traditional network security relies on firewalls that assume networks can be divided into trusted inside and untrusted outside zones.

However, with employees and devices located across various locations, this inside/outside model no longer applies.

The company introduced a zero-trust architecture that eliminates implicit trust and instead verifies every user, device, application, and transaction before granting access.

Rather than routing all traffic through on-premise appliances, Zscaler’s cloud-native platform securely connects users directly to applications, regardless of location.

This provides significantly better security than legacy firewalls while also lowering costs through massive economies of scale.

As the world’s largest security cloud, the company processes over 400 billion daily transactions through its more than 150 data centers globally.

Zero trust has become a critical strategy for organizations to enable remote work and cloud adoption securely.

Gartner estimates that by 2026, 60% of enterprises will have implemented a zero-trust approach.

The company’s zero trust solutions not only provide better security than legacy firewalls but also a superior user experience.

This has helped Zscaler achieve the dominant market position, with over 50% of the Forbes Global 2000 now trusting it to secure their networks and users.

Unlike legacy vendors, Zscaler was built from the ground up as a cloud-native platform. This allows it to continuously innovate and stay ahead of the competition.

For example, its AI and machine learning capabilities like Zscaler AI and Zscaler Digital Experience, enhance security, visibility and performance.

In addition to these technological advancements, the company recently introduced Z-Flex, a new purchasing program designed to offer customers more adaptable, usage-based solutions.

Z-Flex changes traditional software licensing by allowing clients to modify their security services as needed without undergoing new procurement processes.

In its initial quarter, this program has already achieved $65 million in total contract value bookings.

However, the market has yet to fully grasp the profitability and potential of Zscaler. The company’s as-reported EBIT margin has been negative throughout its history.

When we clean up the accounting, the company’s actual performance becomes more apparent.

As-reported accounting makes Zscaler look like an unprofitable business, while Uniform accounting shows us the reality that this is a profitable company with an improving Uniform earnings margin.

Uniform earnings margin rose to 13% in 2024 from (2)% in 2019.

With the zero trust market still in its early growth phase and cybersecurity demands only increasing, Zscaler looks poised to deliver continued strong financial performance for the foreseeable future.

While the stock has appreciated significantly from its pandemic lows, it may still be undervalued relative to Zscaler’s long runway for profitable growth in a large and expanding market.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research