Motley Fool Money - Right Place, Right Time for Zscaler

Episode Date: June 2, 2025

The cybersecurity company saw its stock shoot up 10% on Friday. Is that dumb luck or something more? (00:21) Andy Cross and Asit Sharma discuss May’s market bounce, plus earnings from ZScaler and Ulta Beauty. Companies discussed: ZS, NOW, ULTA, ELF Host: Andy Cross Guest: Asit Sharma Producer: Anand Chokkavelu Engineer: Dan Boyd Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, sponsor jobs have four times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsor job credit at Indeed.com slash podcast. Terms and conditions apply.

Stocks rocket higher. in May, you're listening to Motley Full Money. Welcome to Motley Full Money. I'm Andy Cross, joined here by fellow Stock Advisor, Asset, Asset, Asit Sharma. Thanks for being here, Asit. Andy, great to be here with you. Well, today on the show, we're catching up with earnings from Z-Scaler and Alta Beauty. But we start with U.S. stocks posting their best month since late 2023, Osset. The S&P rose 6% in May and is now within 4% of its all-time February high. the NASDAQ is up more than 25% from those April lows. It's kind of like investors have shaken off the tariff and growth worries.

We just had a month ago. So I think the question is, what should investors do now? Yeah, Andy, I think investors should balance their risk appetite with some realism here. I mean, the number of companies that were able to confidently project out their outlook for the next quarter or even 2025, I felt like I could count them on one hand this quarter. Yeah. The market's gotten really used to these wild swings of panic from like, okay, this is going to be the worst potential trade outcomes to euphoria over, okay, maybe this is the not-so-worst

outcome. That's not a stable state for investing. And I think investors, from my perspective, they should keep investing, but be rational here. Don't assume that favorable conditions for stock outperformance are in place because they simply aren't yet. What do you see? Yeah, I think the market, you know, it was at 22 times earnings and it dropped down to about 18 times during those April lows. And now it's jumped back up to the 22 times earnings. So I think like caution, I did more stock buying in April into May, and I've been kind of a little bit more slowing down that when I look at, you know, just some overall sentiment measurements,

I said, the American Association of Individual Investors, that sentiment index read almost 42, percent bearish versus 61.9 percent bearish back in April. So the individual investor has become less bearish over time. And that's actually a little bit of a contrary indicator. We have the same thing on our own website. We talk about the potential growth indicator, which is now at 11 and a half versus 14 in April. And the lower that goes, the more euphoric your average investor gets because it means that there's more capital tied into stocks, relative to cash on the sidelines. And that euphoria starts to signal a little bit of caution in my mind. I think, you know, you start to get some investors who look a little bit more euphoric as opposed

of pessimistic. The valuations get a little bit more stressed. And I think stocks get a little bit more richly valued. So I think it's time to think about a little bit more selective securities like, oh gosh, the likes of booking or maybe a progressive as opposed to going in with really high-end growth. What do you think? Yeah, sometimes it feels like you're taking volatility as a Ford indicator. So you see, for example, what the fix has done, which is a predictor volatility. And adjusting your stock purchases for that, that almost seems very short-term in nature, Andy, but I think it's smart in terms of picking up the kinds of stocks you want at the prices you want. So when the market is getting a little too

complacent, that might be time to look at stocks, which have those lower trading multiples, vice versa, also holds. Yeah, I think those ones that are really cash heavy, that sell a little bit more reasonable, even like a company like Microsoft, you know, it just has, it is so ingrained. And so something that looks a little bit more like that, rather than something a little bit more on the speculative side, a little bit more on the higher growth, higher multiple side, I love those kinds of businesses, and we do too here, Asset, and you and I do. But, you know, those don't jump really to the top of my list when we start seeing valuations move up this high like we've seen over the last month or so.

I agree. Let's move on to earnings. I'll start with Z-Scaler, the zero-trust cloud cybersecurity specialist, jumped nearly 10% offset on Friday after reporting really healthy fiscal third quarter earnings that included a third straight quarter of 23% growth in annual recurring revenue. That's really a key metric that we like to track with Z-scaler. What caught your attention when you look at the cybersecurity leaders' earnings? from last week. Andy, I also liked that growth in annual recurring revenue, or ARR, as it's

popularly called. I also liked another acronym RPO, remaining performance obligation. Think if this as revenue backlog. That grew 30% year over year. So this is equal at $5 billion to almost two years worth of revenue. Now, of course, Z-scaler isn't going to stop growing, so this isn't really two years worth of revenue, but it just shows you the backlog of contractions, contractual work the company has built. That stood out to me. And also, the role AI is playing in revenue composition. I think this proves out something that many of us suspect, but we don't get a chance to see it a lot in action, which is a strong company that's a little boring, can stay stronger for a lot longer than you'll pay attention. And I feel like people have forgotten

about Z-scaler in some ways with the emergence of companies like CrowdStrike, the resurgence of a business like Fort Nett, these seem to be much more in the conversation these days in the cybersecurity place. But here we have Z-Scaler, which has created highly effective AI agents, for one thing, to help companies deal with security operations tasks. So it comes to mind that the business, which was built around sort of this zero-trust architecture, really played well and plays well in an age of AI threats. Now, you could call that dumb luck, and maybe to some extent it is. But it also reminds me of strong companies, Andy, like Nvidia, which have sort of leading tech that prove themselves worthy of the next use cases. Now, we can say with

Nvidia, they sort of create those new use cases. But I really like that. Just reading through the call, looking at these numbers today, the strength and ongoing business is underpinned by AI demand. Yeah, it's interesting. I mean, dumb luck, maybe, but also right place, right time, Jay Chondry, who's the founder, the CEO, major shareholder in the business continues to drive it forward. I really like what I saw from some of the new initiatives, and they think about that zero trust branch they have, which expands outside like core operating, and they saw some really impressive performance from that product. Also, you mentioned the AI initiatives. Their sales progress, they introduced something this year called Z-Flex, which is a little bit more offset of a usage-based pricing,

mechanism and trying to push more and more clients to encourage using and signing up for this. And they've seen some real benefit from that initiative, too. They hire a new sales director, Mike Rich, who came over from Service Now, which also has some consumption-based uses systems and pricing mechanisms and their own products. So I like how they're innovating both on the product side, but really driving the sales side. And I like that. And they talk a lot about how that ongoing ARR, that, annual recurring revenue metric is going to be more important as they continue to build out the

modules and then their clients have this consumption-based pricing method to be able to add or take off different modules as they see fit based on what they need. So I like what we're seeing there, and I also like the fact that they boosted guidance a little bit. Revenues they expect to be up 23% for this fiscal year. Now, it's a fiscal fourth quarter coming up. So 23% versus 22%, the prior period, and they're operating margin. They increased that a little bit, too, and then they're just at EPS. So the one thing to watch, I think, is a dollar-based retention rate fell a little bit this quarter, and they are talking about these innovations and the cost of those innovations, Austin, and going to market. And that costs money to do that, and they're

willing to take a little bit of the margin hit to kind of go into that. But I like the fact that they continue to innovate on both the product side, as well as the sales side. Yeah, you're right, Andy. Jay Chaudry is someone who pushes on a lot of fronts, and that's what you want in a CEO. On this new sort of consumption-based model, the flex model, it's interesting. We saw right after the pandemic, a couple of years after the pandemic, when interest rates spiked, so many companies that we admire in the software-as-a-service world, testing out these consumption models, saying, okay, if you guys don't want to pay us up front for years at a time, we get that. Everyone's trying to control costs. So we'll have a little bit.

bit of pay as you go. Now, this flex program is consumption-based a little bit, but it also brings in this other concept, which I think is very powerful for a company like Z-scaler. Traditionally, Z-scaler sign-up companies for years on specific modules. And so if you wanted to change anything, Andy, you had to go through a new procurement process, filled with negotiations. Very complex. Everybody wanted to do that, which is complex. I mean, that's not a lose-lose, but it's not a win-win either. It's sort of like, okay, we'll just take a pass. So a company, The company couldn't get the products it wanted when things evolved. Neither could Z-scaler get the revenue.

But here we have, and I think this is because things are moving so fast with AI, the ability of a company to say, look, okay, we signed up for these modules, but if you can give us the same pricing, we want to switch out some. Let's take this new, for example, random example out of the top of my head, this AI prompt injection threat protection. We want that module. So under this new plan, you can do that. The uptake of the Flex program, although it's small, has been pretty quick.

And then lastly, just to circle back on the cost structure, I sort of agree with you. This is a company that if it wanted to, it could be turning a gap profit right now. They tend to work at sort of break-even gap margins to slight losses. And it's not because the company's not growing. You mentioned that 23% growth right at the top as a headline number in the AR, Andy. But here we've got, again, Jay Trotter and his team not afraid to spend on R&R. to bump that expense up, to keep evolving with AI, not afraid to invest in the direct sales force team.

And I will say, I'm excited that you brought up the fact that their sales force is being directed by someone who comes over from service now, which I've often said. These are the assassins of the enterprise world. They like to aggressively form deep relationships with enterprises and sign great contracts, very hard to dislodge. So Jay Chaudry now is directing his sales force to, yeah, to invest in getting these deeper relationships as they go on. Yeah, let's get down to the stock's at about $275. You got a $42 billion market cap. Now it sells at about 15 times revenue asset versus about 10 times last fall. So a little bit more expensive. What do you think about the stock here? You know, I think if you're

a holder of this company, you have much more reason to feel confident after the last few quarters. than perhaps this time last year. But I'm not so sure I'm a buyer at this point. I mean, one thing I have to qualify all this praise of the company with some realism. A dash of realism. The trading multiples feel a little inflated to me. Now, they always do with Z-scaler. It is a company that's growth-oriented, has great free cash flow margins. I think of 18%. Management was talking about exceeding the rule of 50. They called the rule of 52. But basically, when you add free cash flow growth to revenue growth, if you can get above 40 or 50. These are great benchmarks, and I'm not dragging on those. But just to say, this is historically a company that has been

a little volatile vis-a-vis investor sentiment. So if you like Z-scaler, I'm going to bet that with the sort of macro picture we have for the rest of the year and its historic volatility, you probably can get a better price if you're patient. And AC, one thing you've taught me is true, the patient can often get that price they're looking forth if they are able to hold out and keep the cash ready. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British

and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic, sporting personality with elegance to deliver a truly instinctive drive. Inside, you'll find true modern luxury with the latest innovations in comfort. Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response two fine-tuned your vehicle for the roads ahead. The Range Rover event is on now. Explore enhance offers at I think they'll do about $3 billion in that AARR this year. And at this multiple, after the

performance has been so strong, I think I'm willing to just kind of just sit back. I own it. I'm completely comfortable holding it. Not really eager to jump in, but if I see it pull back, this quarter was very impressive. And I like those initiatives. And as Jay said on the call, cyber continues to get a lot of interest. IT budgets are constrained in general, but cybersecurity security is one spot where clients are willing to spend, and that's going to benefit Zescaler, I think, for many, many years ahead. Let's pivot over to retail. Asset Alta Beauty shot up 12% on Friday after delivering first quarter results that, gosh, really showcased its strength in beauty retail. Comps are up 2.9% driven by 2.3% increase in average ticket size and 0.6% increase

in transactions, Asset. And the retailer took market share. What did you see in the earnings that you liked. The thing that stood out to me, Andy, is the model here. And I think the strength of Ulta's model has been obscured over the last year. So it's been tough if you're an investor in this world of beauty and cosmetics. But this particular model is very much based in the idea of beauty, the concept of beauty. And we can see just from the world writ large how pervasive social media is on people's understanding of personal aesthetics. their own appreciation of themselves, how they look. And I think that Alta really plays on this.

I want to paraphrase something that CEO Keisha Stilman said about the quarter and about recent trend at Alta. She said that consumer engagement with beauty is healthy because people are willing to trade other stuff in order to keep buying their beauty products. They're willing to take these tradeoffs. So here we have beauty, not as so much of a discretionary item for a certain set of people, but almost as a staple that you are going to continue to buy it. But at the same time, Keisha said that they're very cautious about value, so the company has to bring that value.

We'll dial into this a bit more in just a moment here. What did you see out of these results? Yeah, Keisha said that many consumers indicate that they are leaning into beauty as comfort and escape from the stress of macro uncertainty. So there's been often that long line that investors are focused on Asset, that beauty tends to be very resilient. And I think we've seen that struggle over the past, you know, like you said, past year, 18 months or so.

So I think there's a lot of expectations that are not very high coming into this quarter. And Alta exceeded those expectations, and they boosted their guidance a little bit in the new CEO, Kisha Steeleman, who I think has a real plan for Alta. She talked about her Alta Beauty and Leashed initiative that is going to drive core growth, scale into new business lines, streamline cost structures. So I think she set up a really good plan. And she talked about how they took some market share gain.

They had better member engagement in the in-store performance, which is someplace where she's really focusing on. And I think Alta is excelling. I think that all started to show up. Now, that is costing money. So they are making investments. Their CAPX is going to grow somewhere between 13 or 15. percent up to 30 percent this year. They're going to invest it back in the stores. They're seeing some cost pressure on the employee side. So they are making the investments. But I think with the

scale they have, it's actually good investments. And ultimately, that return on capital is going to be well served for investors. I think you're hitting on something that the market's picked up on, Andy, which is to say, look at the outlook for this company for the rest of the year. It's actually decreasing. I think comparable sales are going to land between 0% to 1%. for the entire fiscal year. So, why did the stock react the way it did? I think it's the taking of market share, but also seeing that the plan for new stores continues, they're going to open 60 stores this year. So if you take that, sort of divided by the base, rough numbers, this is a company that's growing its store count by 4 to 5 percent a year. I have to be careful here,

Andy, because sometimes when I talk fast, people hear 45 percent, but no, 4 percent to 5 percent. But, hey, for retail, that's a pretty steady store count. So if you can put a little bit of comps growth on top of that and manage that bottom line, it becomes a very nice economic model that investors can feel confident about. This is something else that came through during the discussion, post-earnings. The idea, as Keisha said, that, look, retail, some of the success is kind of Retail 101. It's the basics, right? She said it's about being focused and controlling what the company can.

control in a dynamic, which is very up for whatever the whim of current trade wins are this morning. Next week when we wake up. So this environment against that, you can control costs. And they talked about this, as you just alluded to, giving up a little bit of margin, putting more people in place during store hours. So taking on that load on the payroll, getting inventory in-house, again, if you don't have it in-house, you can't sell it. And just keeping with that store opening cadence, you see a company that's managing its cost structure pretty well, but also making the investments to keep those customers engaged. They've got some 45 million people in their loyalty program. Yeah. So it is a well-rounded business. And as some of this dust settles

around the whole beauty and cosmetics sector, I think folks will be looking to concentrate capital into just a few high-quality names. We like ELF, Elf Beauty at Stock Advisor, and that's been making a comeback. This is another high-quality company, and I think the post-earnings results sort of reflect that vote of confidence. Yeah, I spent about 15 bucks in an ALTA just yesterday on some ELF products, so supporting both those companies. We'll get to the stock in a second. I said, I just didn't want to touch a little bit in the tariff. She mentioned that only about 1% of their merchandise is direct import. So the rest is really partnering with their brands. And so there's some questions about how much the, where's the pricing going to fall if tariffs increase? And we'll have to

see how that all plays. I was impressed just quickly on their strength in the fragrance. The fragrance was one of their leading spots and just new brands, really investing into new brands and bringing new brands and partnering those brands inside the store. They hosted 20,000 in-store events this quarter with a lot of them with product partners. Right. That's to that engagement that they're so good at. And I think for the demographic that they aim, which is younger and younger, those brand endorsements are very important. We're sort of a personality-driven consumption culture. And also is pretty good at that. I want to go back to one thing, though, and let's ding him here a bit, Andy.

Just give a demerit here. I'm not saying it's disingenuous, but I think the risk is a little higher of tariffs than the company presented. I totally get it. You're featuring brands in your portfolio in your stores. 1% is direct import. But if your brand portfolios have to raise prices because of tariffs, then that's going to affect the folks who walk into the store. So I still think they've got a little bit more exposure than they may have discussed. Not that they were trying to hide it.

The discussion didn't center enough around, okay, what's the impact? If we get on the cosmetics level, I know 15% higher prices later this year, I don't know if we'll see that much. But to me, that's a risk. Well, we talked about that with Elf. You know, Elf manufacturing products and where's the tariff come and who has pricing power? How does that get passed on to the retailer? The one thing about Alta that I think they have shown very much like other big box retailers is that scale. And they did say we have the ability we think to be able to navigate those.

But proof is going to be in the pudding or maybe in the makeup palette, you know, as we see how that pricing shakes out. Let's get to the stock. So, by the way, I will say they repurchase 986,000 shares at about 3,000. $363 per share. The stock right now is at $4.73, so that quarterly investment, at least as of right now, has been good for shareholders. Stocks up 10% this year, kind of flat against the market. Are you buying? Yeah, I would be a buyer here, Andy. I tell you one of the things that is still apparent is the company's below. It's sort of historical trading multiples on some fronts. Not by much, but enough that if you've got the long-term vision

for this company, you understand that real estate cadence. You think that this company can hold its own against some new entrants, like look at Sephora going into Kohl's locations, right? That's a big competitor that folks talk about. Well, going forward, looking at a company that's trading close to 20 times its next 12 months' earnings per share. I feel that it's good. Maybe you're not getting a bargain basement price, especially after being up 10 percent. And this is retail, after all. We were talking about technology earlier growth stocks. This is never going to grow as quickly as a Z-scaler. On the other hand, I don't think it's a bad price here. So I'm more amenable to making a purchase here. What about you?

Yeah, I agree with you. She had talked about the, you know, the historical growth of beauty is like 2 to 5%. They think that will continue to grow. I think they can take some market share, they're making those investments into their stores. I think that's going to pay out dividends. And they have that membership business. It was up 3% members who are up 3% this quarter. So not huge growth, but enough because a lot of those membership, of which I am now one after joining this weekend, that generates a lot of the growth that you see, that they see in the stores and tied to a lot of their new marketing initiatives that Keisha Steeleman and her team are taking on. So I be a buyer of Alta, even after a little bit of this ramp,

but don't be greedy. Just nibble if you, if somebody wants to nibble on that, that's fine. I bought some earlier this year, so I'm pretty happy. All right, Andy Cross. I'm going to be looking for you to go back in store and make my nibble worth it later this year. I'll do that for Both of us and all those shareholders who also have followed us into Altust Stock. Awesome, Trauma. Thanks so much. Appreciate your thoughts on Alta, the stock market, and Z-Scala. This is a lot of fun.

Thanks a lot, Andy. That does it for us here at Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. Our all personal finance content follows Motley Fool editorial standards and is not approved by advertisers. advertisements are sponsored content and provided for informational purposes only. To see our full

advertising disclosure, please check out our show notes. Ross is Sharma and the entire Motleyful money team. I'm Andy Cross. Thanks for listening and Fool on.