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For the fourth quarter, Zscaler projects total revenues between $565 million and $567 million. The Zacks Consensus Estimate is pegged at $567.6 million, which indicates growth of 24.8% from the year-ago quarter's level.
Zscaler anticipates non-GAAP earnings per share (EPS) between 69 cents and 70 cents. The Zacks Consensus Estimate for fourth-quarter non-GAAP EPS has remained unchanged at 69 cents over the past 60 days, which implies a 7.8% increase from the year-ago quarter’s level of 64 cents.
Image Source: Zacks Investment Research
The cloud-based security solution provider projects non-GAAP income from operations between $107 million and $109 million. The company’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average surprise of 33.4%.
Let’s see how things might have shaped up prior to the announcement.
Factors Shaping Zscaler’s Upcoming Results
Zscaler’s fourth-quarter results are expected to reflect the sustained robust demand for its security and networking solutions, given the continuous growth in the global security space. The solid adoption of ZS’ in-cloud security platform, Zero Trust Exchange, due to the ongoing digital transformation across enterprises and the rising trend of hybrid work is likely to have acted as key catalysts.
The growing adoption of Software-Defined Wide Area Network (SD-WAN) solutions may have acted as a primary driver in the fiscal fourth quarter. Per the latest Global Market Insights report, the market size for SD-WAN solutions and products is expected to reach $69 billion by 2032 from $7.2 billion in 2023, witnessing a CAGR of 27%. As there are only a handful of vendors that offer security and SD-WAN solutions, ZS has been benefiting from the increasing opportunities in this space. The company’s partnerships with VMware and Silver Peak have been helping the company secure SD-WAN deliveries. This is expected to have aided Zscaler’s fiscal fourth-quarter performance.
ZS’ existing core products, mainly the Zscaler Internet Access and Zscaler Private Access, have been driving customer retention. The addition of new features to its Zero Trust Exchange, such as Cloud Access Security Broker, Cloud Browser Isolation, Cloud Protection, Zscaler Digital Experience and Cloud Security Posture Management for software-as-a-service applications, is expected to have driven its product portfolio expansion and customer acquisition.
Our estimate for fourth-quarter revenues from Channel Partners and Direct Customers is pegged at $517.2 million and $48.2 million, respectively. We expect the remaining performance obligation at the end of the fourth quarter to be approximately $3.86 billion.
Nevertheless, growing investments to improve sales and marketing (S&M) capabilities and higher research and development (R&D) costs may have weighed on the company’s fiscal fourth-quarter bottom line. Zscaler witnessed a year-over-year increase of 17.3% in non-GAAP S&M and 29.1% in non-GAAP R&D expenses in the last reported quarter. Total non-GAAP operating expenses climbed 22.2% year over year in the last reported quarter.
Zscaler Stock Price Performance & Valuation
Year to date (YTD), Zscaler shares have plunged 11%, underperforming the Zacks Internet – Services industry’s growth of 14.2%. ZS stock has also underperformed its peers in the cloud-based security solution space, such as CrowdStrike Holdings (CRWD - Free Report) , Palo Alto Networks (PANW - Free Report) and CyberArk Software (CYBR - Free Report) , which have risen 6.4%, 21.5% and 30.8%, respectively, YTD.
YTD Price Return Performance
Image Source: Zacks Investment Research
Now, let’s look at the value Zscaler offers investors at the current levels. ZS stock is trading at a premium with a forward 12-month P/S of 11.27X compared with the industry’s 5.29X, reflecting a stretched valuation.
Image Source: Zacks Investment Research
Investment Consideration for ZS
Zscaler is benefiting from the rising demand for cyber-security solutions due to the slew of data breaches. The increasing demand for privileged access security in digital transformation and cloud migration strategies is a key growth driver.
A strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, safeguards it from the negative impacts of ongoing macroeconomic headwinds. Portfolio expansion through acquisitions like Avalor, Canonic Security and ShiftRight is praiseworthy.
However, its aggressive investment in S&M and R&D might weigh on its near-term profitability. To survive in the highly competitive cyber-security market, each player must continuously invest in broadening its capabilities. Over the past few years, Zscaler has invested heavily to enhance its S&M capabilities, particularly by increasing the sales force.
Investment in R&D is a top priority for Zscaler. Over the last couple of years, it has almost doubled its R&D expenses to improve the design, architecture, operation and quality of its cloud platform. Though the company foresees these investments to garner benefits over the long run, it is negatively impacting margins and profit growth.
Conclusion: Hold ZS Stock for Now
While the long-term outlook for this Zacks Rank #3 (Hold) company remains bright, the near-term challenges associated with its profit growth and the stock’s high valuation warrant caution. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Therefore, we believe that it’s prudent to avoid new purchases of ZS stock for now. For existing shareholders, holding on to Zscaler stock is the best course of action, as the long-term growth drivers are still firmly in place.
Image: Shutterstock
Should You Buy, Sell or Hold Zscaler Stock Before Q4 Earnings?
Zscaler (ZS - Free Report) is scheduled to report fourth-quarter fiscal 2024 results on Sep. 3 after market close.
For the fourth quarter, Zscaler projects total revenues between $565 million and $567 million. The Zacks Consensus Estimate is pegged at $567.6 million, which indicates growth of 24.8% from the year-ago quarter's level.
Zscaler anticipates non-GAAP earnings per share (EPS) between 69 cents and 70 cents. The Zacks Consensus Estimate for fourth-quarter non-GAAP EPS has remained unchanged at 69 cents over the past 60 days, which implies a 7.8% increase from the year-ago quarter’s level of 64 cents.
Image Source: Zacks Investment Research
The cloud-based security solution provider projects non-GAAP income from operations between $107 million and $109 million. The company’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average surprise of 33.4%.
Zscaler, Inc. Price and EPS Surprise
Zscaler, Inc. price-eps-surprise | Zscaler, Inc. Quote
Let’s see how things might have shaped up prior to the announcement.
Factors Shaping Zscaler’s Upcoming Results
Zscaler’s fourth-quarter results are expected to reflect the sustained robust demand for its security and networking solutions, given the continuous growth in the global security space. The solid adoption of ZS’ in-cloud security platform, Zero Trust Exchange, due to the ongoing digital transformation across enterprises and the rising trend of hybrid work is likely to have acted as key catalysts.
The growing adoption of Software-Defined Wide Area Network (SD-WAN) solutions may have acted as a primary driver in the fiscal fourth quarter. Per the latest Global Market Insights report, the market size for SD-WAN solutions and products is expected to reach $69 billion by 2032 from $7.2 billion in 2023, witnessing a CAGR of 27%. As there are only a handful of vendors that offer security and SD-WAN solutions, ZS has been benefiting from the increasing opportunities in this space. The company’s partnerships with VMware and Silver Peak have been helping the company secure SD-WAN deliveries. This is expected to have aided Zscaler’s fiscal fourth-quarter performance.
ZS’ existing core products, mainly the Zscaler Internet Access and Zscaler Private Access, have been driving customer retention. The addition of new features to its Zero Trust Exchange, such as Cloud Access Security Broker, Cloud Browser Isolation, Cloud Protection, Zscaler Digital Experience and Cloud Security Posture Management for software-as-a-service applications, is expected to have driven its product portfolio expansion and customer acquisition.
Our estimate for fourth-quarter revenues from Channel Partners and Direct Customers is pegged at $517.2 million and $48.2 million, respectively. We expect the remaining performance obligation at the end of the fourth quarter to be approximately $3.86 billion.
Nevertheless, growing investments to improve sales and marketing (S&M) capabilities and higher research and development (R&D) costs may have weighed on the company’s fiscal fourth-quarter bottom line. Zscaler witnessed a year-over-year increase of 17.3% in non-GAAP S&M and 29.1% in non-GAAP R&D expenses in the last reported quarter. Total non-GAAP operating expenses climbed 22.2% year over year in the last reported quarter.
Zscaler Stock Price Performance & Valuation
Year to date (YTD), Zscaler shares have plunged 11%, underperforming the Zacks Internet – Services industry’s growth of 14.2%. ZS stock has also underperformed its peers in the cloud-based security solution space, such as CrowdStrike Holdings (CRWD - Free Report) , Palo Alto Networks (PANW - Free Report) and CyberArk Software (CYBR - Free Report) , which have risen 6.4%, 21.5% and 30.8%, respectively, YTD.
YTD Price Return Performance
Image Source: Zacks Investment Research
Now, let’s look at the value Zscaler offers investors at the current levels. ZS stock is trading at a premium with a forward 12-month P/S of 11.27X compared with the industry’s 5.29X, reflecting a stretched valuation.
Image Source: Zacks Investment Research
Investment Consideration for ZS
Zscaler is benefiting from the rising demand for cyber-security solutions due to the slew of data breaches. The increasing demand for privileged access security in digital transformation and cloud migration strategies is a key growth driver.
A strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, safeguards it from the negative impacts of ongoing macroeconomic headwinds. Portfolio expansion through acquisitions like Avalor, Canonic Security and ShiftRight is praiseworthy.
However, its aggressive investment in S&M and R&D might weigh on its near-term profitability. To survive in the highly competitive cyber-security market, each player must continuously invest in broadening its capabilities. Over the past few years, Zscaler has invested heavily to enhance its S&M capabilities, particularly by increasing the sales force.
Investment in R&D is a top priority for Zscaler. Over the last couple of years, it has almost doubled its R&D expenses to improve the design, architecture, operation and quality of its cloud platform. Though the company foresees these investments to garner benefits over the long run, it is negatively impacting margins and profit growth.
Conclusion: Hold ZS Stock for Now
While the long-term outlook for this Zacks Rank #3 (Hold) company remains bright, the near-term challenges associated with its profit growth and the stock’s high valuation warrant caution. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Therefore, we believe that it’s prudent to avoid new purchases of ZS stock for now. For existing shareholders, holding on to Zscaler stock is the best course of action, as the long-term growth drivers are still firmly in place.
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