I Just Bought My First Cybersecurity Stock. Here's What It Is.

I've been a stock investor for more than 20 years, and have owned dozens of technology stocks throughout that time. But I've never owned a pure-play cybersecurity company before.

That changed recently when I opened a position in Zscaler (NASDAQ: ZS) a couple of weeks ago. The stock fell sharply over the past year on AI disruption concerns, and even after a rebound, it sits around 45% below its 52-week high.

To put it mildly, I think the market has this one wrong. Here's why.

Image source: Getty Images.

Zscaler: The 30-second version

If you aren't familiar with what Zscaler does, it operates a "zero trust" platform that helps companies secure access to apps and data. All traffic from remote workers, cloud-based apps, or internal systems is funneled through Zscaler's cloud, which inspects it to ensure access is allowed. Think of it as a checkpoint that employees must pass through to access what they need.

One common misconception is that Zscaler competes with fellow cloud-based cybersecurity company CrowdStrike (NASDAQ: CRWD). But CrowdStrike solves a different problem. It monitors activity on PCs, servers, and cloud-based apps to detect and shut down malicious activity. In simple terms, Zscaler secures network traffic, while CrowdStrike secures devices. Plenty of companies run both.

Why the market has Zscaler wrong

Widespread adoption of AI expands the potential for cyberattacks in a few ways, some of which could be massive tailwinds for Zscaler.

Consider this. Bots, AI agents, and other non-human sources recently surpassed 50% of all internet traffic for the first time. But some industry experts believe this could be just the beginning. Cloudflare's (NYSE: NET) CEO recently said that non-human traffic could be 1,000 times greater than human traffic within five years.

Every AI agent, service account, and API integration is a new identity that can be compromised. If agentic AI traffic grows exponentially over the next few years, Zscaler (which gets paid based on traffic and users flowing through its cloud) could be a massive beneficiary.

In the most recent quarter, Zscaler's annual recurring revenue grew 25% year-over-year, but with agentic AI traffic ramping up, this could accelerate further. The business has strong margins (16% free cash flow margin), and management has done a great job of building out AI tools and making bolt-on acquisitions to prepare for the opportunity.

Of course, there are significant risk factors. Zscaler has significant competition from companies including Palo Alto Networks (NASDAQ: PANW) and Microsoft (NASDAQ: MSFT). And, at 42 times forward earnings, it isn't exactly a cheap stock. But Zscaler sits directly between applications and users, which is a solid place to be as thousands of new non-human users begin to access the enterprise's systems.

Matt Frankel, CFP® has positions in Zscaler. The Motley Fool has positions in and recommends Cloudflare, CrowdStrike, Microsoft, and Zscaler. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.