This has been a forgettable yr for Zscaler (NASDAQ: ZS) traders thus far: Shares of the cybersecurity specialist have misplaced 30% of their worth yr up to now, and issues went from unhealthy to worse for the corporate following the discharge of its fiscal 2024 fourth-quarter outcomes on Sept. 3.
Although it delivered better-than-expected numbers, Zscaler’s inventory plunged by 17% the day after that quarterly report as administration’s steerage for the present quarter and the brand new fiscal yr have been properly under expectations. Let’s take a look at the the reason why Zscaler’s steerage wasn’t up to speed and contemplate whether or not this drop on this inventory’s worth ought to be seen as a shopping for alternative.
Zscaler’s steerage factors towards a major slowdown
In its fiscal This fall, which ended July 31, Zscaler’s income elevated 30% yr over yr to $593 million, which was properly forward of Wall Avenue’s consensus estimate of $568 million. The cybersecurity firm’s adjusted earnings elevated 37% to $0.88 per share, crushing the consensus estimate of $0.69 per share.
That spectacular development was a results of the corporate’s increasing buyer base, in addition to an enchancment in buyer spending. As an illustration, the variety of giant prospects which have generated greater than $1 million in annual recurring income (ARR) for Zscaler elevated 26% yr over yr to 567. In the meantime, the variety of prospects with greater than $100,000 in ARR jumped by 19%.
On the most recent earnings conference call, Zscaler CEO Jay Chaudhry remarked that the demand for Zscaler’s zero belief safety options stays stable, whereas the emergence of generative artificial intelligence (AI) is “creating new avenues of development for us.” Nevertheless, it seems to be like Zscaler’s catalysts are going to take a backseat within the first half of the brand new fiscal yr.
The corporate is forecasting $605 million in income within the first quarter of fiscal 2025, which might be a 22% improve from the identical quarter final yr. It expects non-GAAP web revenue to land at $0.625 per share, a decline from the prior-year interval’s studying of $0.67 per share. Briefly, Zscaler’s top-line development is ready to decelerate significantly within the present quarter, with administration mentioning that “the macro stays difficult” and noting that prospects are nonetheless scrutinizing giant offers.
In easier phrases, Zscaler administration says that the corporate is at the moment witnessing a difficult spending surroundings. That may very well be attributed to a slowdown in enterprise spending on account of upper rates of interest and a tepid financial scenario. On the similar time, the decrease margin profile of Zscaler’s rising merchandise and the corporate’s investments in cloud and AI infrastructure clarify why its earnings are set to shrink within the present quarter. Earlier than the most recent report, consensus estimates had been forecasting $0.73 per share in earnings for fiscal Q1.
The steerage for the complete yr is not very promising both as Zscaler expects its high line to land at $2.61 billion. That will be a 20% improve from fiscal 2024 ranges when the corporate’s high line elevated by a wholesome 34%. Additionally, the full-year earnings steerage of $2.84 per share is approach decrease than the $3.33 per share consensus estimate and could be a contraction from the $3.19 per share it earned in fiscal 2024.
In all, it isn’t shocking to see why traders pressed the panic button following Zscaler’s newest report. Nevertheless, there are a number of particulars that counsel that this firm might stage a turnaround.
Trying previous the corporate’s cautious steerage
There isn’t any denying that Zscaler’s sell-off following its newest quarterly report appears justified. However on the similar time, traders should not miss the truth that the corporate is constructing a sturdy long-term income pipeline that would assist it regain its mojo.
Extra particularly, Zscaler’s remaining efficiency obligation (RPO) stood at $4.4 billion final quarter, an enchancment of 26% from the identical quarter a yr earlier. Moreover, its dollar-based web retention fee of 115% signifies that its present prospects proceed to spend more cash annually on its choices. (This metric compares the spending by an organization’s established prospects in 1 / 4 to the spending by those self same prospects in the identical quarter final yr, so a studying of greater than 100% implies that the adoption of Zscaler’s cybersecurity companies is enhancing.)
Furthermore, Zscaler asserts that it has a total addressable market (TAM) value $96 billion, which leaves it loads of alternatives for development. So the troubles that Zscaler is dealing with proper now might ultimately pave the best way for stronger development sooner or later. That is the rationale why it might change into a sensible purchase for opportunistic traders trying so as to add a possible growth stock to their portfolios.
After the current pullback, Zscaler inventory is buying and selling at 10 instances gross sales, considerably decrease than its five-year common gross sales a number of of twenty-two. After all, that decrease gross sales a number of may be attributed to its forecast for a near-term slowdown in its development, but when its fortunes rebound when macro circumstances ease, that valuation might appear like a cut price looking back, notably contemplating its stable income pipeline and sizable addressable market.
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Harsh Chauhan has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Zscaler. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially replicate these of Nasdaq, Inc.
