Recent IPO Zcaler One to Watch

It's been about a month since the Zscaler (ZS) IPO, so it may be worth a look given the recent market correction in technology stocks and the fact that the company's shares have fallen back a bit from the first trade of its IPO on March 16.

Zscaler Inc. is an up-and-coming cloud security software that has many integration deals with networking and communications services companies. There is a huge benefit to this approach, because it puts the security software in the cloud instead of relying on appliances or network patches.

Futuriom covered Aryaka's recent deal with Zscaler, which integrated Zcaler security with the Aryaka's PASSPORT security suite on its software-defined wide area network (SD-WAN) service. product. But Zscaler has many deals, including a recent partnership with carrier Sprint, as well as AT&T, BT, Microsoft, Orange Business Services and others.

In many of these deals, Zscaler packages its cloud security service with another network service or security portfolio. This is the future of security -- away from appliances and hardware and into the cloud.

Zscaler shares surged on their first day of trading, after the company priced its IPO at $16, above the original range. The shares that day opened in the low twenties on the first trade and finished the day slightly over $33 on large volume of 16.8 million shares. Morgan Stanley and Goldman Sachs were the lead underwriters. As one of the hottest private silicon valley companies, the IPO was oversubscribed and the price was increased several times. The company told Bloomberg it had rebuffed takeover offers prior to the IPO.

Now the shares are discounted from that first day of trading, recently trading hands at around $28 giving the company a market cap of $3.2 billion. Zscaler sales grew from $80.3 million in 2016 to $125.7 million in fiscal year 2017, which ended July 31, 2017. It booked 84.8 million in revenue in the first half of this fiscal year. So, revenues are still relatively small but the company is growing quickly. Zscaler lost about $35.5 million in the last fiscal year, as it's still investing in growth, and it does not expect to break even this year.

How large could Zscaler grow? One close comparable in the market is Palo Alto Networks (PANW), which last booked $1.7 billion in in annual revenue for its fiscal year and has a market cap of $17 billion. It's not inconceivable that if Zscaler continues to execute, it could have a similar trajectory to Palo Alto with more than $1 billion in revenue and a market capitalization of more than $10 billion.

One of Zscaler's biggest rivals is Cisco, which has a multibillion-dollar security portfolio. But many of Cisco's security products are still tied to hardware and Zscaler is a cloud pure play. It could also be an acquisition target for a larger security company such as Cisco or Symantec.