March 12, 2018 | Blog

Zscaler IPO: A (Good) Sign of Things to Come?

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.

Healthy Sign for Private Valuations

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.

Expect More Security Software IPOs

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.

Source: SharesPost Research. 2017 Year-End Investor Survey, N = 755 survey respondents
What We Like About Zscaler

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.

Zscaler Waterfall Chart
Zscaler Waterfall Chart
What Worries Us About Zscaler

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.

Summary

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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This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.