Zscaler (NASDAQ: ZS) had a robust Q2 and raised its guidance, but it was not enough to lift the market. The results and valuation suggest the stock is priced to perfection following the post-release price drop, and there are headwinds to growth in the air.
Trading at 100X this year’s earnings estimates and 80X next, it will be years before this company grows into its current valuation, and it may not grow as fast as forecast, given Palo Alto Networks’ (NASDAQ: PANW) lean into platformization. Palo Alto Networks is working to centralize its product line and offer free services to attract new clients. Because it is the largest and leading player in cyber security, its efforts will impact Zscaler and other cyber security names.
However, that headwind is offset by the analysts' sentiment and depth of coverage, which point to new highs for the stock. Marketbeat.com tracks thirty-seven analysts with current ratings and pegs the stock at Moderate Buy. That’s a solid support base, and they have been lifting their price targets. The consensus lagged the market before the release but is up 20% YOY and steady following the news. The post-release dip aligned the market briefly with the consensus, but the price action is up from its lows ahead of the open.
The first revisions to hit the wires are mixed and come from Wedbush, Bernstein, and Needham, including one upward, one downward and one reiterated target with a three-analysts consensus of $276. That target is 20% above the post-release action and a two-year high for Zscaler. Wedbush’s Dan Ives called the quarter impressive and Zscaler a top name to own as the shift to cloud-based cybersecurity accelerates.
Zscaler Had a Solid Quarter and Raised Guidance
Zscaler had a solid quarter with outperformance in all metrics and guidance raised above the analysts' consensus. The company reports $525.0 million in net revenue for a gain of 35.4% over last year. The 35.4% growth is another sequential slowdown but is 350 basis points above consensus, compounded by margin and guidance. Calculated billings and deferred revenue grew by 27% and 35%, respectively.
The margin news is the best. The company narrowed its GAAP losses significantly due to the top-line leverage and spending controls while the adjusted operating margin expanded by 700 basis points. The net result is income more than doubled, leaving adjusted earnings at $0.76 or $0.18 above forecast. Cash flow and FCF also grew significantly, rising 27% and 19% YOY.
Guidance is another factor that should help to lift the stock over time. The company raised its guidance for Q3 and the year to a range above consensus. The new guidance forecasted $2.73 to $2.77 in adjusted earnings compared to the consensus of $2.48, and guidance may be raised again later this year. The company’s latest offering restructures the way access is granted based on client company policy, allowing users to determine access, not location or device, and it may gain traction as the year progresses.
Zscaler builds equity for shareholders
Zscaler is firing on all cylinders and providing solid cash flow for operations. The Q3 results allowed for another cash build and balance sheet improvement, aiding a 32% increase in shareholder equity. Cash flow will remain solid through year-end and next year, so additional gains are expected and may help lift the market.
The price action in ZS stock is bearish in early premarket trading, but there are some signs investors are buying the news-driven dip. Market support appears solid above the 150-day EMA, and analysts are favorable, so a rebound could begin soon. In this scenario, the market could quickly recover the post-release plunge and retest the recent highs. Critical resistance is near $250; a move above that level would be bullish. The risk is that Zscaler could become range-bound at current levels and move sideways until later in the year.
