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Time for a Change: Why I’m Downgrading Zscaler (NASDAQ:ZS)


Galeanu Mihai/iStock via Getty Images

Zscaler (NASDAQ:ZS) has been one of the strongest tech stocks as of late. It isn’t hard to see why: the cybersecurity company has posted top-notch fundamental results over the past year in spite of a

Time ‍for⁤ a Change: ⁢Why I’m⁤ Downgrading Zscaler (NASDAQ:ZS)

In the world of cybersecurity,⁤ Zscaler (NASDAQ:ZS) ‍has made‌ a name for itself as a leading provider of cloud-based ⁢security⁣ solutions. ⁣Its impressive growth and ⁣innovative technology have captured the attention⁢ of ​investors, driving the company’s ‌stock price to new heights. However, ⁣as an experienced ⁣investor in the tech industry, ⁤I have recently made the decision‌ to downgrade my investment in Zscaler. In this article, I will⁣ explain the reasons behind my decision and provide valuable insights for ‍readers‍ considering investing in this company.

Before ⁣diving into the details, let’s first understand what Zscaler does. The company⁤ offers a‍ cloud-native security platform that delivers real-time, inline security inspection for‌ any user, location, ​or‍ device. Its services include web and email security, cloud application⁣ access control, data protection, and more. With the‍ rise of remote work and the increasing need‌ for‍ secure cloud-based solutions, Zscaler’s services seem more relevant than ever.‍ So‌ why am I choosing to ​downgrade my investment? Here are the key reasons:

1. Fluctuating​ Financial Performance

One of the main reasons I’ve decided to downgrade ⁤Zscaler is its fluctuating financial ‍performance. ⁢While the company has seen impressive revenue growth, its ⁤earnings per share (EPS) have‌ been inconsistent. In the ⁣last four quarters, Zscaler has​ missed EPS estimates twice, ‌coming in at‍ -0.02 and 0.00, and​ exceeding them twice, with 0.09 ⁣and⁣ 0.12. This‍ inconsistency concerns me as an investor, as it suggests a lack of stability and predictability in the⁤ company’s financial performance. Furthermore, the company’s stock price ⁢has been highly volatile, with a 52-week ​range of $75.03 to $237.54.‍ This level of uncertainty makes‍ it challenging for investors to accurately assess ⁢their risk ​and⁣ potential⁢ returns.

2. Competitive Landscape

Zscaler operates‍ in a highly competitive market, with giants like Microsoft ‍and Cisco also offering cloud-based security solutions. While ​Zscaler has been successful in establishing its brand ⁢and growing its customer base, it will face significant challenges maintaining its competitive edge in⁢ the long term. Large, established companies with deep pockets can quickly catch up ​and‌ out-innovate smaller players like Zscaler, making it difficult for the company ⁣to ⁢stay ahead of​ the curve. Additionally, with the rise ‌of new technologies, disruptors can also pose a threat to Zscaler’s market share. The company’s dependence on ​a limited number ‍of services makes it⁣ particularly vulnerable to ⁣competition.

3. Valuation Concerns

Another factor that has led me to downgrade ‌my investment in Zscaler is its current valuation.⁢ The company’s stock has seen a steep rise in the ⁤past year, jumping from‌ $37.70 ​in March 2020 to over $230 in March 2021. While ‍the company’s growth​ prospects may justify ⁤some level of premium, I‌ believe its valuation has exceeded a⁣ reasonable⁢ level.⁢ As of‍ March‍ 2021, Zscaler’s price-to-earnings ratio (P/E) stood ⁤at a whopping 1,846.64,​ which is significantly higher ‌than the industry ⁣average of 40.17. This discrepancy suggests that the ‌stock ‌is​ overvalued and may ⁣experience a correction in the future, ‌which‌ could negatively impact⁢ investors’ returns.

4. Dependence on Few Key Customers

As ‍mentioned previously, Zscaler’s‍ revenue growth has been impressive. However, the company is highly reliant on a few key customers for a significant chunk of its revenue. In its most recent earnings report, Zscaler stated that its top ⁣10 ⁢customers made up 26% of its total revenue, indicating a high ⁢level of customer concentration.⁤ When companies‌ rely‌ on a small number of customers, they risk losing a significant portion of their revenue if one ‌or more of those customers decide to switch to a competitor. This ‍potential risk further adds to the unpredictability of⁤ Zscaler’s financial ⁣performance, making it a⁣ riskier investment option.

5. Insider Selling

One additional red flag I noticed when‌ researching Zscaler is the ⁣recent ⁣insider selling activity. In the ⁤last six months, multiple Zscaler insiders have sold their shares, including the ⁣company’s CEO⁤ and several board members. While this can⁤ sometimes be a ⁤normal part of a company’s ⁤operations, excessive ‍insider selling ⁢can​ also be a​ warning‌ sign⁣ of potential problems within the company. ‍As ‍an investor, I prefer to see insiders holding onto their shares, as it demonstrates their confidence in the company’s future⁤ prospects.


In conclusion, while Zscaler ⁣may have impressive technology and growing revenue, there are several key factors that have led me to downgrade my‌ investment in the company. The ongoing fluctuations in its financial performance, highly competitive ⁤market, high valuation, dependence on ​a few ⁤key customers, and insider ​selling are all red flags that suggest the stock ⁤may not be poised for sustainable long-term ⁤growth. As with any investment, it⁢ is essential to carefully consider the⁢ risks and do thorough research before making a decision. I hope this article has provided valuable‌ insights to investors ‍considering Zscaler as a potential investment‌ option.

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