Zscaler Stock Is Estimated To Be Significantly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Zscaler (NAS:ZS, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $169.78 per share and the market cap of $23.1 billion, Zscaler stock is estimated to be significantly overvalued. GF Value for Zscaler is shown in the chart below.


Zscaler Stock Is Estimated To Be Significantly Overvalued
Zscaler Stock Is Estimated To Be Significantly Overvalued

Because Zscaler is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 40.1% over the past three years and is estimated to grow 35.63% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Zscaler has a cash-to-debt ratio of 1.54, which which ranks in the middle range of the companies in Software industry. The overall financial strength of Zscaler is 4 out of 10, which indicates that the financial strength of Zscaler is poor. This is the debt and cash of Zscaler over the past years:

Zscaler Stock Is Estimated To Be Significantly Overvalued
Zscaler Stock Is Estimated To Be Significantly Overvalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Zscaler has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $536 million and loss of $1.44 a share. Its operating margin is -30.22%, which ranks worse than 79% of the companies in Software industry. Overall, the profitability of Zscaler is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Zscaler over the past years:

Zscaler Stock Is Estimated To Be Significantly Overvalued
Zscaler Stock Is Estimated To Be Significantly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Zscaler is 40.1%, which ranks better than 92% of the companies in Software industry. The 3-year average EBITDA growth rate is -35.1%, which ranks in the bottom 10% of the companies in Software industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Zscaler's return on invested capital is -27.13, and its cost of capital is 6.78. The historical ROIC vs WACC comparison of Zscaler is shown below:

Zscaler Stock Is Estimated To Be Significantly Overvalued
Zscaler Stock Is Estimated To Be Significantly Overvalued

Overall, the stock of Zscaler (NAS:ZS, 30-year Financials)is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Software industry. To learn more about Zscaler stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.

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