Zscaler (ZS) received an upgrade from Macquarie from "Neutral" to "Outperform," raising the price target from $166 to $231. The cloud developer's stock is up over 88% year-to-date and continues to see an upside as new regulations and increased cybersecurity threats lead to potential growth.

Fred Havemeyer, Macquarie US Head of Software Research, joins Yahoo Finance to discuss the upgrade as well as new regulations from the Securities and Exchange Commission (SEC) that he believes is a "constructive tailwind for the cyber security industry".

"Some of these cyber threat actor groups are almost forming cartels at the moment, where central ransomware as a service provider is essentially the black market analog as software as a service provider, are now actually setting rates for how they expect all of their own consumers to charge victims of ransomware attacks base on the size and scale of organizations." He goes on to say: "We do think this... sets up constructive demand tailwinds for the entire cybersecurity industry, for those... platforms and companies also that can provide real-time analytics and risk visibility."

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Video Transcript

- It's roared in 2023, Fred. It's up about 90%. It just hit a 52-week high. How does valuation look to you, Fred, versus peers? I mean, you obviously still think constructive?

FRED HAVEMEYER: Yeah. So I tend to cover the very growthier spaces. And I think that even within that, when we take a look at the balance of Zscaler's growth and its margin potential, we still see upside here. So at the core of our upgrade, we took a look at the long-term margin potential of Zscaler to see where there might be more room in our model. We found that in the long run here, when growth slows at maturity, that we estimate Zscaler can achieve a mid-40s% non-GAAP operating margin, which gave us the opportunity to raise our target price.

And when we take a look at the background here, really what we're doing is we're saying that at the least Zscaler should be worth about as much as other cybersecurity and DevOps Cloud and software peers such as CrowdStrike such as Cloudflare and also Datadog. So we think that there's room both on a valuation basis and on a fundamental basis.

JULIE HAYMAN: And, Fred, for that matter, do you think that while you think that Zscaler is uniquely well-positioned here, do you think that these new rules are going to be a boon for the whole industry?

FRED HAVEMEYER: I think in general, it is a constructive tailwind for the cybersecurity industry. I think that if we just take a look at the big picture of what's happening here, I mean, the attacks are a very large scale. One thing we particularly called out that's absolutely fascinating is that some of these cyberthreat actor groups are almost forming cartels at the moment.