The COVID-19 pandemic forever changed the way we work…
In fact, three years later, millions of people still work from home. And many of these folks use company (and even personal) computers to do their jobs.
But the thing is… without a secure office network, the threat of a cyberattack rises.
Businesses need to prevent hackers from stealing sensitive data. They want to protect credit-card information, Social Security numbers, bank details, trade secrets, and more.
And yet, it only takes one well-planned cyberattack to wreck a business.
That’s why so many companies prioritize cybersecurity these days…
Today, we’ll look at a major player in this industry. This company profited in the aftermath of the pandemic’s work-from-home setup. But then, it crashed as the world reopened.
It’s a lesson in weathering market ups and downs. It shows us why uptrends alone shouldn’t fuel our investment decisions. And as you’ll see, the Power Gauge is still “bearish” today…
Whether the economy shuts down or not, all businesses need to protect their digital assets.
And Zscaler (ZS) led the pack in this sector during the COVID-19 pandemic…
The company provides superior network protection. It specializes in something called “zero trust” security. Here’s a quick rundown…
Hackers can penetrate common firewalls.
But zero-trust security is different. It assumes that all computers pose a threat – even the ones on its own network. In other words… it doesn’t trust anyone.
Zero-trust security requires verification every time a user tries to access new information. That helps protect networks of classified data.
And Zscaler is darn good at its job…
It’s one of the world’s best zero-trust security leaders. And research firm Gartner ranks it as the best company at combining “completeness of vision” with “ability to execute.”
This cybersecurity innovation helped Zscaler soar long before the pandemic…
From 2016 through 2022, the company’s annual revenue growth averaged 54%. Its stock peaked at $368.78 per share on November 19, 2021.
But Zscaler soon became overvalued. Its price-to-sales ratio and projected price-to-earnings ratio rose to roughly 77 and nearly 385, respectively.
The company isn’t profitable, either. In 2015, it reported an operating loss of $12.4 million. And last year, its operating loss ballooned to $326.7 million.
As interest rates climbed in 2022, many investors didn’t want to wait any longer for future profits. And high-growth tech stocks like Zscaler took the brunt of the sell-off…
On January 6, Zscaler closed at $103.96 per share. That’s nearly 72% below its peak.
But then, the latest tech-stock rally restored some hope. And Zscaler surged yet again…
From its January 6 bottom through February 15, the stock climbed roughly 37%. The Global X Cybersecurity Fund (BUG) and the Technology Select Sector SPDR Fund (XLK) both rose around 19% in that span.
Then came Zscaler’s latest quarterly earnings report on March 2…
On the surface, the company’s numbers looked good. Its sales grew 52% year over year. And its quarterly operating loss narrowed from $83.9 million to $65.2 million.
But Zscaler’s stock is down about 22% since its earnings report. So what gives?
Well, it’s not due to shifting market sentiment. Tech stocks are still thriving. XLK is up around 8% over the same span. And even BUG is roughly breakeven since March 2.
Demand for Zscaler’s products remains high. But the company is taking longer to complete orders. The ongoing economic uncertainty doesn’t help. And competition is growing.
Whatever the reason, tech stocks’ early 2023 recovery no longer includes Zscaler.
The Power Gauge gives us more insight into this shift…
It’s “bearish” on Zscaler today. And it has been for most of the past year. Take a look…
The company gets a “very bearish” rating in the Financials category and a slightly better “bearish” rating in Technicals. That paints a grim picture for this cybersecurity innovator.
Our takeaway is simple…
The Power Gauge is our guiding light. It helps us find strong companies to own. But at the same time, the system also reminds us that even strong companies have some baggage.
More importantly, any uptrends could be short-lived – especially in volatile periods.
So as investors, we need to always keep our guard up.
Good investing,
Marc Gerstein
