The benchmark S&P 500 index is off to a rocky start in 2025, with a year-to-date loss of over 5% already. However, some stocks are bucking the recent market turbulence.
Shares of Zscaler(NASDAQ: ZS) have climbed nearly 10% so far this year, partly on the back of a strong financial report for its fiscal 2025 second quarter (which ended Jan. 31). The company is a specialist provider of cybersecurity software, and it's experiencing robust demand from businesses as they try to navigate an increasingly dangerous digital environment.
Despite its recent strength, Zscaler stock remains 45% below its all-time high, which was set during the tech frenzy in 2021, so it's not too late for investors to buy. In fact, The Wall Street Journal tracks 45 analysts who cover Zscaler stock, and the overwhelming majority have assigned it the highest possible buy rating -- and not a single analyst recommends selling.
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Zero-trust cybersecurity is critical for modern organizations
In the modern economy, businesses need to operate online if they want to maximize their potential sales and tap into the global workforce. But having a digital presence also comes with significant risks because businesses are exposed to cyberattacks 24 hours per day, seven days a week.
Remote workers, for example, can create significant vulnerabilities. Managers can't physically see them, so it's difficult to know whether their attempts to sign into the company's network are genuine or if their usernames and passwords have been stolen. Zscaler pioneered the zero-trust cybersecurity architecture to mitigate those risks. Its Zero Trust Exchange platform treats every login attempt as hostile, analyzing not only the employee's credentials but also their location and the device they are using to confirm it's really them.
However, it doesn't stop there. The Zero Trust Exchange only connects each employee to the digital applications they need to complete their jobs, so even if a malicious actor breaches the login stage, they still won't have access to the entire corporate network.
Zscaler introduced a new segment to its platform last year called Zero Trust Branch. It runs every factory, warehouse, and device used within an organization through the Zero Trust Exchange, effectively treating it as hostile and forcing it to operate in isolation from a cybersecurity perspective. That means even if one of those assets succumbs to an attack, the chances of it spreading are practically nil.
The Branch product helps Zscaler realize its goal of creating a "Zero Trust Everywhere" world, where every facet of an organization runs through its exchange and is fully secured. At the end of the fiscal 2025 second quarter, Zscaler said 130 of its customers have adopted the Zero Trust Everywhere approach, and it wants to triple that number over the next 18 months.
Zscaler is approaching GAAP profitability
Zscaler generated $647.9 million in revenue during its fiscal 2025's second quarter, which was a 23% increase from the year-ago period. It was also comfortably above the company's guidance of $634 million, which prompted management to increase its full-year forecast for fiscal 2025 by $14 million to $2.647 billion (at the midpoint of the range).
The result was especially impressive because Zscaler has been carefully managing costs to improve its bottom line, which means spending less aggressively on growth-oriented expenses like marketing. In fact, through the first half of fiscal 2025, the company grew its total operating expenses by just 19%, which was much slower than its revenue growth of almost 25% during the same period.
As a result, more money flowed to Zscaler's bottom line. It still generated a net loss -- based on generally accepted accounting principles (GAAP) -- of $19.7 million in the first half of fiscal 2025, but that was a 68% reduction from the $61.9 million net loss it delivered in the prior-year period.
However, Zscaler was actually profitable to the tune of $251.8 million during the period on a non-GAAP basis, which excludes one-off and non-cash expenses like stock-based compensation. That was a 35.1% increase compared to the first half of fiscal 2024, which further highlights how much progress the company is making at the bottom line.
This is a big shift from the growth-at-all-costs strategy Zscaler used in 2021. While it's true the company was growing its revenue far more quickly back then, it was burning through truckloads of money in the process because of its aggressive approach to spending. By taking a more balanced approach to growth and profitability, Zscaler is now building a business that will be more sustainable over the long term and capable of delivering steady returns for investors.
Wall Street is very bullish on Zscaler's stock
The Wall Street Journal tracks 45 analysts who cover Zscaler stock, and 27 of them have assigned it the highest possible buy rating. Three others are in the overweight (bullish) camp, while the remaining 15 recommend holding. No analysts recommend selling.
Their average price target for the stock is $236.50, which implies a modest potential upside of 18% over the next 12 to 18 months. The Street-high target of $270 is a little more juicy, pointing to a potential upside of 35% instead.
But Zscaler stock could do even better over the long term, thanks to a combination of its attractive valuation and the company's strong growth. The stock currently trades at a price-to-sales (P/S) ratio of 12.4, which is a discount to some of the other cybersecurity leaders like Palo Alto Networks and CrowdStrike:
Moreover, Zscaler values its total addressable market at $96 billion, so it has barely scratched the surface of that opportunity based on its current revenue. According to Cybersecurity Ventures, cybercrime could cause a whopping $10.5 trillion in damage to the global economy during 2025, so demand for advanced protection is only going to grow from here.
Zscaler stock was unquestionably overvalued when it peaked at around $370 during the tech frenzy in 2021, but the company has grown its revenue significantly since then, so it might be in a position to reclaim that level if it continues on its current trajectory. As a result, this name could be a great addition to any diversified portfolio.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Zscaler. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
