Zscaler will be the first unicorn to hit Wall Street this year so investors are naturally playing close attention to the San Jose-based cybersecurity firm’s IPO, tentatively planned for March 16. The company plans to sell up 11.5 million shares at $10 to $12 per share. Zscaler, which will operate under the ticker ZS, could raise up to $112 million.
If Zscaler shares are valued at the high-end of its IPO range, the company is worth up to $1.41 billion compared to its most recent private valuation of $1.09 billion (as of Aug 2015). Since tech IPOs can serve as a key indicator of investor sentiment, Zscaler’s thirty percent private to public markup can be a promising sign for other unicorns.
Zscaler’s IPO comes at an opportune time. We’ve tracked 21 VC-backed tech IPOs over the past 24 months in the chart below. According to our data, 13 companies enjoyed IPOs that exceeded recent private valuations, while eight companies suffered down-round IPOs. Zscaler falls roughly in the middle of the pack.
Our recent 2017 Year-End Investor Sentiment Survey identified security software as one of the three most promising areas of opportunity out of eleven sectors. According to our investor survey, over fifty-five percent of investors selected fintech as one of the top three areas of opportunity, followed by big data analytics and enterprise security (at forty-two percent and thirty-nine percent, respectively). While recent IPOs such as Okta and Forescout have yielded mixed results, ZScaler’s premium public valuation presents a good omen for several software companies that could go public this year, including Illumio, Tanium, Crowdstrike, and AlienVault.
Founded in 2008, Zscaler has grown into a leading cloud-based security company that offers a wide range of products and services for businesses of all sizes. The company boasts 2800 customers, including over 200 of the Forbes Global 2000, across all major geographic regions and most major industries. Such diversity limits the risk that Zscaler will need to depend on any one group of customers. Furthermore, a growing demand for cybersecurity software from both governments and businesses will only benefit the company. For example, the European Union in May will implement the General Data Protection Regulation (GDPR), which requires countries to strengthen data protections for all individuals living in the EU.
From a valuation perspective, Zscaler exhibits strong fundamental metrics - revenue growth above fifty percent, gross profit margin of eighty percent. At an implied valuation of roughly $1.41 billion, Zscaler would be trading at roughly 11 times 2017 (LTM) revenues. By comparison, Sendgrid, Okta, MongoDB, and MuleSoft are trading in the range of 9 to 15 times LTM revenues growing at roughly thirty-five to fifty-five percent.
The company, which lost a combined $75.7 million over the past three fiscal years, has yet to demonstrate it can generate profits. Moreover, the company will likely continue to lose money for the foreseeable future as it continues to rapidly expand. While Zscaler’s business model is far from uncommon for emerging software companies, the continued losses represent a significant risk.
In addition, Zscaler faces intense competition. Larger and more established companies ranging from Palo Alto Networks and Symantec to Cisco and Juniper Networks are all racing to offer software designed to secure cloud data.
We also urge caution on Zscaler because of the volatile nature of the global cybersecurity market. New innovations - especially those related to artificial intelligence or quantum computing - can massively disrupt the industry. Thus, Zscaler’s overall strategy and intellectual property portfolio might prove ill-equipped to adapt to such sudden shifts in the cybersecurity landscape.
Zscaler’s IPO could bode well for private investment. Zscaler’s global network of customers and consistent history of growth presents a compelling opportunity for investors with a long-term view of the company and the cybersecurity market.
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