Title: Should You Invest in Zscaler Stock Post its Price Drop and Raised Guidance? A Fresh Look
While the market showed robust growth throughout 2024, forcing many tech companies to surge, Zscaler (ZS 1.44%) has yet to join the party. Evidence of this struggle was apparent when sunlight burst through the cloud of optimism, as shares fell following the release of its first-quarter results for fiscal 2025. As of now, the stock has taken a 10% tumble from its initial 2024 position.
Surprisingly, despite the company's strong revenue growth and enhanced guidance, Zscaler remains stagnant. So, let's delve into the details to figure out if this stock plunge reflects reality or presents an enticing buying opportunity.
Embracing the Challenge: Guidance Increase
In the quarter that ended October 31st, 2024, Zscaler posted a remarkable 26% revenue growth year-over-year, reaching an impressive $628 million. This figure soared well beyond the initially projected revenue range of $604 million to $606 million.
Investors, however, reacted with indifference, focusing instead on the company's calculated billing growth. Although it climbed 13% year-over-year to $516.7 million, this figure fell short of expectations. Meanwhile, deferred revenue—a growth indicator—bounced back more resiliently, soaring 27% to $1.78 billion.
Adjusted earnings per share (EPS) romped ahead as well, climbing from $0.55 to $0.77—a significant jump that exceeded the forecasted EPS of between $0.62 and $0.63.
The company demonstrated exceptional financial muscle, boasting $331.3 million in operating cash flow and $291.9 million in free cash flow. Fortunately, Zscaler kept a tidy nest egg, with a $2.7 billion cash reserve and $1.15 billion in convertible debt.
Revenue
Zscaler continues to impress in its retention efforts, maintaining a thriving dollar-based net retention rate of 114%, similar to its last quarter's 115%. Looking at its upselling abilities, Zscaler saw substantial growth, particularly in its Zscaler Private Access (ZPA) sector. This zero-trust connectivity solution—a potential replacement for older VPN technology—showed remarkable traction.
$2.6 billion and $2.62 billion.
Emerging solutions such as Zscaler Digital Experience, Zero Trust for Branch and Cloud, and AI analytics also received a warm welcome within the company's customer base.
$2.623 billion to $2.643 billion
Zscaler's new financial targets went up like a flag, with full-year revenue set between $2.623 billion and $2.643 billion, a far cry from the previously projected $2.6 billion and $2.62 billion. Adjusted EPS predictions now stand between $2.94 and $2.99, surpassing the earlier range of $2.81 to $2.87.
Below is a chart demonstrating Zscaler's increased targets.
Adjusted EPS
| Metric | Prior Guidance | New Guidance ||--------|-----------------|-----------------------------|| Revenue | $2.6 bn to $2.62 bn | $2.623 bn to $2.643 bn || Adjusted EPS | $2.81 to $2.87 | $2.94 to $2.99 || Calculated billings | $3.11 bn to $3.135 bn | $3.124 bn to $3.149 bn |
$2.81 to $2.87
For the upcoming fiscal quarter two, Zscaler prognosticated revenue ranging between $633 million and $635 million, with an EPS forecast of $0.68 to $0.69. This forecast aligns closely with analyst expectations—$0.68 in EPS and $633 million in revenue—as compiled by FactSet.
$2.94 to $2.99
Dive Deeper: Is it Time to Buy the Dip?
Zscaler had initially projected billings growth of 13% in the first half of fiscal 2025, with an ensuing acceleration to 23% in the second half. These projections were subsequently validated with an enhanced billing growth of 19% to 20% on an annual basis. This less-than-impressive billing growth isn't worrying in the current context.
Calculated billings
The company's dedication to serving existing customers remains unwavering, with strong upselling occurrences—especially in the ZPA segment. Emerging products also seem to gain traction, which might offset the slow downfall in calculated billings.
$3.11 billion to $3.135 billion
Like many tech companies, Zscaler has embraced AI solutions as a means of driving new customer wins. Data security presents a substantial opportunity—one that Zscaler successfully capitalized on by securing Microsoft's Copilot information. Furthermore, the company is expanding its presence within the ever-important federal government vertical, making significant improvements to its go-to-market plan.
$3.124 billion to $3.149 billion
Zscaler trades at a relatively attractive forward P/S multiple of about 9.6, taking into account current fiscal-year analyst estimates and the company's current revenue growth rate exceeding 25%.
If Zscaler can showcase progress in billings growth during the second half of fiscal 2025—as promised—the stock promises solid upside. Given Zscaler's history of being conservative with its guidance, investors can expect the company to reach its forecasted targets.
In a nutshell, cybersecurity remains a high-priority concern for organizations, making Zscaler a viable and alluring investment opportunity in this sector.
Despite the positive financial data and increased guidance, investors remain skeptical about Zscaler's growth prospects, leading to a 10% decrease in its stock price. To capitalize on this situation, some analysts suggest that investing in Zscaler could present an attractive buying opportunity, especially if the company can demonstrate strong billings growth during the second half of fiscal 2025 as promised.
In light of the company's strong financial position, robust revenue growth, and successful adoption of emerging technologies, it's worth considering allocating finance towards investing in Zscaler's stock, especially considering its relatively low forward P/S multiple compared to its high growth rate.
