No. of Recommendations: 54
I often feel that the best thing to do is nothing, absolutely nothing.

Foolishly sound advice, hmc. Zscaler is not in trouble long-term, they are a next-gen platform, remain extremely sticky, and will only continue to grow. But I don't feel it will be hypergrowth. It was clear from the words right out of the CEO's mouth about a sales stumble, coupled with the abrupt halt to their growth. But after that, I personally still had patience to hold as I felt the negative sentiment got ahead of itself.

Unfortunately, that gave time for a few other concerns to catch up, which all combined into persuading me to sell a majority of my ZS position right after earnings.

I sold for more than a few reasons.

1) The sales stumble combined with growth falling NEARLY IN HALF -- from 65% to 36% in 5Qs.

2) Those sales issues are amplified by their go-to-market approach favoring big complicated "all-or-nothing" deals that require a C-suite decision. [I've criticized this before.]

3) New sales are also likely affected the difficulty in implementing their solution, which requires those big deals to utilize System Integration partners to get Zscaler platform hooked up. [I should have paid attention to this more.]

4) Right before earnings, I identified a competitor who released a carbon-copy of ZS's entire platform, reducing their moat to a dry creek bed. See my Cloudflare writeup. https://boards.fool.com/cloudflare-net-deep-dive-34417701.as....

5) Further research showed that that new competitor has an easy-to-install cloud platform, that are typically self on-boarded (only 15% of their enterprise integrations come from SI partners).

6) This all combines to make me feel that if direct competition from a seasoned edge network provider is here already, that those "hard to sell" and "hard to integrate" issues are going to exacerbate things further, all while the sales team is getting a revamp. Hypergrowth is not likely to return unless Zscaler's platform really shines above the competition.


I have to remind myself that many of those that post on a regular basis, with amazing content, are doing so from the perspective of a highly concentrated portfolio. As such, there appears at times to be a very high level of scrutiny and a very low level of tolerance for those companies that trip, dip or blip and may require some runway (time = reporting quarters) to work things out.

DING DING DING.

Concentrating was one of the best lessons I gleaned from Saul's Knowledge Base here. The fact I now have a lower number of companies in my port means I can truly follow those companies more closely. Combine that with how then 20+ other sets of eyes and viewpoints come out on this board, and I think we all end up with a great view into current state of their execution and market positioning.

That said, in my past days of 30+ and even 60+ stocks in my portfolio, I would completely agree with you on holding and seeing through what is sure to be a short-term issue. And even if ZS remains at high 30s to low 40s range of growth, they will do well as a stock once they focus on turning the profit dial. But now that I do have a concentrated portfolio, I find that I am watching all my companies (and a very short watch list) a lot more closely now. There isn't a reason to hold what I'll call LAGGARDS IN EXECUTION when so many others are executing to perfection or very near it. I heard excuses from the CEO a bit on the call.

In the financials, we have a pretty clear view of it going from hypergrowth (>50%) to second tier (30-50% range). The opportunity cost is too great to hold and wait. At least, that is what I now tell myself - I am still a touch slow to act. And now I find it costing me more and more.

So good luck holding ZS. It's still a great company and a high grower, and it may even return quickly back to hypergrowth with the new B2B product line -- especially if they turn around sales plus focus on the different go-to- market they can take with B2B. I think, however, solving their "hard to integrate" issue is going to be difficult and take some time - and now with fresh competition that take a completely different tack in go-to-market. I bet Fastly and Akamai are taking notes too (other global edge networks). I don't like the way this is adding up for ZS.

Don't feel intimidated about holding it from here or having a different opinion on it, and PLEASE don't stop following it and reporting on it! Folks will continue to follow stocks Saul no longer holds, and posters still talk SHOP (ha!)... as well as SQ, VEEV, NTNX and others... even when it's not in the majority of reported ports here. We are all interested in following those high-growth companies too, and good reports/posts here make that way easier.


-muji
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