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Zscaler (ZS) Plunges 16% in a Month: Should You Buy the Dip?
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Zscaler, Inc. (ZS - Free Report) , a leader in zero-trust cybersecurity, has recently seen its stock price take a significant hit, plunging nearly 16% in the past month. This sharp decline exceeds the broader market's performance, with the S&P 500 down 5.5% and the Zacks Computer and Technology sector dropping 10.4%.
The primary driver behind this decline is the broader market sell-off, fueled by macroeconomic concerns. Investors are jittery due to uncertainty around the Federal Reserve's interest rate policies and fears of a potential U.S. recession. The recent disappointing job report from the U.S. Department of Labor has only intensified these worries about the state of the economy.
This drop, more severe than the broader market’s performance, has understandably made investors wonder if it’s time to buy the dip or stay on the course.
Despite the macroeconomic challenges, Zscaler’s financial performance has been nothing short of impressive. Over the last four quarters, the company has consistently beaten earnings expectations, with an average surprise of 33.4%. In its most recent fiscal third-quarter fiscal 2024 results, Zscaler posted a 32% year-over-year increase in revenues and a whopping 83% surge in non-GAAP earnings per share, underscoring its strong market position.
The Zacks Consensus Estimate forecasts 22% revenue growth and an 8.7% earnings increase for fiscal 2025. Moreover, Zscaler’s long-term earnings growth rate is pegged at 26.5%, slightly above the industry average, signaling continued strength in its core business.
Image Source: Zacks Investment Research
Portfolio Strength Aids Customer Growth
Zscaler’s commitment to innovation is a major driver of its success. The company continually enhances its platform, most recently with the introduction of Zscaler Digital Experience and advancements in its Zero Trust Exchange platform. These innovations are designed to address the ever-evolving security challenges that businesses face, ensuring that Zscaler remains a critical partner in their digital transformation efforts.
Strategic acquisitions also play a crucial role in Zscaler’s growth. The acquisition of Avalor in March 2024, for example, expanded Zscaler’s data capabilities within its Zero Trust Exchange, integrating more than 150 pre-built solutions that help customers better predict and prevent security vulnerabilities.
Zscaler’s robust portfolio strength helps it attract and retain a diverse range of customers across industries such as finance, healthcare, manufacturing and government. By the end of the third quarter of fiscal 2024, Zscaler had secured 523 customers with annual recurring revenues (ARR) exceeding $1 million and 2,922 customers with ARR more than $100,000. This expanding customer base is a clear indicator of Zscaler’s market leadership and ability to deliver solutions that meet the unique needs of various industries.
ZS Enhances Competitive Edge Through Partnerships
Zscaler’s strategic partnerships with major technology providers, including Microsoft (MSFT - Free Report) , Amazon’s (AMZN - Free Report) Amazon Web Services (“AWS”) and Alphabet’s (GOOGL - Free Report) Google Cloud, have further bolstered its market presence and enhanced cloud security offerings.
Zscaler’s collaboration with Microsoft involves integrating its Zero Trust Exchange platform with Microsoft Azure Active Directory. With Amazon’s AWS, ZS offers advanced security solutions tailored for AWS environments. Zscaler’s alliance with Alphabet’s Google Cloud integrates its security solutions with Google’s infrastructure, offering comprehensive protection for users.
These strategic alliances with Microsoft, Amazon and Alphabet enable Zscaler to provide state-of-the-art security solutions, ensuring secure digital transformation for enterprises. By leveraging these collaborations, Zscaler strengthens its market position and continues to innovate in the dynamic cybersecurity landscape.
Valuation and Technical Indicators Signal to Hold ZS
While Zscaler’s long-term prospects are promising, its current valuation raises some concerns. The stock’s one-year forward price-to-sales ratio of 9.93X is significantly higher than the Zacks Internet - Services industry average of 5.30X, suggesting that much of its anticipated growth is already reflected in the stock price. This leaves little room for error and increases the risk of volatility in response to any negative news or earnings shortfall.
Moreover, Zscaler’s shares have recently dipped below their 50-day and 200-day moving averages, a bearish signal that could indicate further downward pressure in the short term. These factors suggest that while Zscaler remains a solid investment, now may not be the best time to increase exposure.
Moving Average
Image Source: Zacks Investment Research
Final Thoughts: Hold for Long-Term Gains
In summary, Zscaler’s recent stock decline, while unsettling, doesn’t overshadow the company’s strong fundamentals and growth potential. Its impressive financial performance, commitment to innovation, expanding customer base and strategic partnerships all point to a bright future. However, given the stock’s current valuation and technical signals, it’s prudent to avoid new purchases for now.
For existing shareholders, holding on to Zscaler is the best course of action. The long-term growth drivers are still firmly in place, making this a stock worth holding through the current market turbulence. Currently, Zscaler carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Zscaler (ZS) Plunges 16% in a Month: Should You Buy the Dip?
Zscaler, Inc. (ZS - Free Report) , a leader in zero-trust cybersecurity, has recently seen its stock price take a significant hit, plunging nearly 16% in the past month. This sharp decline exceeds the broader market's performance, with the S&P 500 down 5.5% and the Zacks Computer and Technology sector dropping 10.4%.
The primary driver behind this decline is the broader market sell-off, fueled by macroeconomic concerns. Investors are jittery due to uncertainty around the Federal Reserve's interest rate policies and fears of a potential U.S. recession. The recent disappointing job report from the U.S. Department of Labor has only intensified these worries about the state of the economy.
This drop, more severe than the broader market’s performance, has understandably made investors wonder if it’s time to buy the dip or stay on the course.
Image Source: Zacks Investment Research
Robust Financial Performance Despite Macroeconomic Issues
Despite the macroeconomic challenges, Zscaler’s financial performance has been nothing short of impressive. Over the last four quarters, the company has consistently beaten earnings expectations, with an average surprise of 33.4%. In its most recent fiscal third-quarter fiscal 2024 results, Zscaler posted a 32% year-over-year increase in revenues and a whopping 83% surge in non-GAAP earnings per share, underscoring its strong market position.
The Zacks Consensus Estimate forecasts 22% revenue growth and an 8.7% earnings increase for fiscal 2025. Moreover, Zscaler’s long-term earnings growth rate is pegged at 26.5%, slightly above the industry average, signaling continued strength in its core business.
Image Source: Zacks Investment Research
Portfolio Strength Aids Customer Growth
Zscaler’s commitment to innovation is a major driver of its success. The company continually enhances its platform, most recently with the introduction of Zscaler Digital Experience and advancements in its Zero Trust Exchange platform. These innovations are designed to address the ever-evolving security challenges that businesses face, ensuring that Zscaler remains a critical partner in their digital transformation efforts.
Strategic acquisitions also play a crucial role in Zscaler’s growth. The acquisition of Avalor in March 2024, for example, expanded Zscaler’s data capabilities within its Zero Trust Exchange, integrating more than 150 pre-built solutions that help customers better predict and prevent security vulnerabilities.
Zscaler’s robust portfolio strength helps it attract and retain a diverse range of customers across industries such as finance, healthcare, manufacturing and government. By the end of the third quarter of fiscal 2024, Zscaler had secured 523 customers with annual recurring revenues (ARR) exceeding $1 million and 2,922 customers with ARR more than $100,000. This expanding customer base is a clear indicator of Zscaler’s market leadership and ability to deliver solutions that meet the unique needs of various industries.
ZS Enhances Competitive Edge Through Partnerships
Zscaler’s strategic partnerships with major technology providers, including Microsoft (MSFT - Free Report) , Amazon’s (AMZN - Free Report) Amazon Web Services (“AWS”) and Alphabet’s (GOOGL - Free Report) Google Cloud, have further bolstered its market presence and enhanced cloud security offerings.
Zscaler’s collaboration with Microsoft involves integrating its Zero Trust Exchange platform with Microsoft Azure Active Directory. With Amazon’s AWS, ZS offers advanced security solutions tailored for AWS environments. Zscaler’s alliance with Alphabet’s Google Cloud integrates its security solutions with Google’s infrastructure, offering comprehensive protection for users.
These strategic alliances with Microsoft, Amazon and Alphabet enable Zscaler to provide state-of-the-art security solutions, ensuring secure digital transformation for enterprises. By leveraging these collaborations, Zscaler strengthens its market position and continues to innovate in the dynamic cybersecurity landscape.
Valuation and Technical Indicators Signal to Hold ZS
While Zscaler’s long-term prospects are promising, its current valuation raises some concerns. The stock’s one-year forward price-to-sales ratio of 9.93X is significantly higher than the Zacks Internet - Services industry average of 5.30X, suggesting that much of its anticipated growth is already reflected in the stock price. This leaves little room for error and increases the risk of volatility in response to any negative news or earnings shortfall.
Moreover, Zscaler’s shares have recently dipped below their 50-day and 200-day moving averages, a bearish signal that could indicate further downward pressure in the short term. These factors suggest that while Zscaler remains a solid investment, now may not be the best time to increase exposure.
Moving Average
Image Source: Zacks Investment Research
Final Thoughts: Hold for Long-Term Gains
In summary, Zscaler’s recent stock decline, while unsettling, doesn’t overshadow the company’s strong fundamentals and growth potential. Its impressive financial performance, commitment to innovation, expanding customer base and strategic partnerships all point to a bright future. However, given the stock’s current valuation and technical signals, it’s prudent to avoid new purchases for now.
For existing shareholders, holding on to Zscaler is the best course of action. The long-term growth drivers are still firmly in place, making this a stock worth holding through the current market turbulence. Currently, Zscaler carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.