Zscaler slips even as Wells Fargo names it top software stock for 2023
Michael Vi

Zscaler (NASDAQ:ZS) shares slipped in premarket trading on Friday even as Wells Fargo named the cloud security company its top software pick for 2023, citing the belief it is the "most resilient" to the challenging global economy.
Analyst Andrew Nowinski, who has an overweight rating and $160 price target on Zscaler (ZS), noted the company is the "best positioned" firm to capitalize on what is believed to be the top growth driver of the year -- zero trust and digital transformation. 
"We believe they have a number of ways to maintain 30%+ revenue growth over the next 12 months, while modestly expanding Operating and Free Cash Flow margin, enabling the company to remain above the 'Rule of 50,'" Nowinski wrote in a note to clients.
By definition, the Rule of 50 is annual revenue growth by percentage plus EBITDA as a percentage of revenue has to equal 50 or more.
Looking to the rest of the year, Nowinski said cybersecurity spending is likely to remain "fairly strong," with overall growth in the high single-digits. However, some areas that will likely be higher priority include cloud security, endpoint security and XDR, identity security and zero trust security, where Zscaler (ZS) is poised to benefit.
Nowinski also noted that investor sentiment shifted towards profitability and free cash flow in the second-half of 2022, as stocks with high operating and free cash flow margins were rewarded, including Check Point (CHKP), Fortinet (FTNT) and Palo Alto Networks (PANW).
The analyst added that Zscaler (ZS) shares fell 65% in 2022 and with the stock trading at just 6.5 times enterprise value to estimated 2024 sales, it is providing investors with an "attractive entry point."
On Thursday, Zscaler (ZS) was mentioned favorably by Wedbush Securities as the firm said the tech sector is "overlooked."