Description

This will be an extremely short short pitch ahead of earnings next week. Hopefully we will get a pass on this content-light write up under promise to be more detailed in our next one. Besides, YoungNewton29 did a fantastic job providing the detailed context for the idea in his May 2020 short write-up, which proved wrong due to his underestimating the magnitude of COVID's impact on ZS's business. ZS, CVNA and TDOC were just a few of the names that burned short sellers during that timeframe, and most of them have now imploded back to fair value (or at least much closer to it), but ZS is still trading ~3x prepandemic levels. Today, we think Zscaler is a compelling short opportunity for the following reasons:

• More than any other public cybersecurity vendor, ZS benefitted from pandemic / WFH tailwinds that are in the process of mean reverting, however business, numbers and valuation do not yet reflect this (unlike with ZM, TDOC, etc..)  
• An IT spend slowdown is unfolding and incremental growth for all vendors, including ZS, will be harder to attain
• ZS is a point solutions vendor that faces intense competition in its SWG / SASE market segment; unlike some point solutions vendors, its product also has weaknesses that were papered over by the recent WFH adoption cycle
• PANW's Prisma access SASE product gets good reviews from customers and is making rapid inroads at far lower cost than ZS; Palo increasingly is honing its attack on ZS and we think it is a matter of time until they blow them up (similar to how CHKP / PANW and others blew up FEYE's APT sandbox back in the day, though ZS is admittedly better run and positioned) 
• Cloudflare and Netskope are also making headway, as has been the case for some time, and are also offering a much cheaper alternative; cost matters in networking, even with the cybersecurity veneer 
• High growth / low profitability cybersecurity companies are trading poorly off of relatively strong prints (CRWD) and are getting absolutely demolished off of misses (OKTA); only strong, FCF compounding "platforms" (PANW) are holding up
• We think the Street is complacent about the looming deceleration at ZS; quarterly surprise magnitude has been rapidly diminishing and we believe customer pushback with regards to product scalability will manifest in longer sales cycles / lost renewals at a time when inbound leads are quickly evaporating 
• ZS is just now beginning to cycle the full 2 years of stacked comps that benefitted from COVID / WFH
• ZS trades at ~15x consensus NTM revenues and over 70x FCF leaving little margin for error, particularly in this environment

Framing downside, OKTA is currently trading at <4x sales after today's miss. ZS is on 15x. Whether the right number is $100, $70 or $50, time will tell. If we are wrong and it goes to 20x, we will come back and say mea culpa!

Catalyst

greater than anticipated growth decel in July or Oct quarters, broadening awareness of competitive challenges