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Zscaler Plunges 19% on Dim Profit Outlook: How to Play the Stock?
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Zscaler, Inc. (ZS - Free Report) , a top-tier cloud security firm, saw its stock fall by 18.7% on Wednesday after releasing its fourth-quarter fiscal 2024 results. Despite showing impressive revenue and earnings growth, the market reacted negatively to a disappointing profit outlook.
This drop has understandably made investors wonder if it’s time to buy the dip or stay on the course.
Zscaler’s Revenue Growth and Market Position Remain Strong
Despite the market's negative reaction, Zscaler's fourth-quarter results weren't all bad news. Its revenues grew by 30% year over year, reaching $593 million, with full-year revenue growth at 34%. Billings grew by 27%, a testament to the strong customer demand for Zscaler’s Zero Trust Exchange platform. The firm also surpassed $1 billion in quarterly bookings, a new milestone, and reached $2.5 billion in annual recurring revenues (ARR).
Zscaler’s position as a leader in the zero-trust security market, securing more than 8,700 customers and protecting nearly 50 million users globally, underscores its deep penetration in the cybersecurity ecosystem. Its Zero Trust Exchange platform, which facilitates secure internet access and application usage, continues to attract high-demand clients, especially as enterprises adopt more hybrid cloud infrastructure.
While competitors like Palo Alto Networks (PANW - Free Report) , Fortinet (FTNT - Free Report) and CrowdStrike Holdings (CRWD - Free Report) also excel in cybersecurity, Zscaler’s cloud-native platform differentiates it in a rapidly evolving landscape where zero-trust architectures are becoming a security standard.
Intraday Price Return Performance
Image Source: Zacks Investment Research
Profitability Concerns: A Temporary Setback for ZS Stock?
The market’s sharp reaction stemmed largely from concerns over Zscaler’s profitability guidance for fiscal 2025. Despite reporting an operating margin of 22% and a free cash flow margin of 23% in the fourth quarter, Zscaler guided for billings growth to decelerate to 19%-20% in fiscal 2025, down from 27% in fiscal 2024. This slowdown is expected to compress profit margins, with a forecast of 20.6% for full-year operating margins falling short of analysts' expectations.
This shift in profitability is more about its aggressive investments in future growth, including expanding its artificial intelligence (AI) and cloud infrastructure capabilities, rather than a fundamental weakness in the business. CEO Jay Chaudhry emphasized that the company’s focus on AI-driven security and infrastructure expansion would be critical for long-term growth, even if it leads to short-term profitability pressures.
Zscaler has been enhancing its AI-driven analytics to provide deeper insights into security threats, driving more upselling opportunities. The company’s acquisition of Avalor and Airgap — both aimed at strengthening its AI and security capabilities — positions it for future growth in the rapidly evolving cybersecurity industry. In the near term, these investments may weigh on margins, but they position Zscaler for stronger growth over the next several years.
Market Dynamics Support Zscaler’s Prospects
Broader market dynamics support Zscaler’s growth outlook. The demand for zero-trust security platforms continues to grow, driven by the increasing frequency of cyberattacks and the need for businesses to secure their digital infrastructure. Zscaler is uniquely positioned to capitalize on this demand with a cloud-native architecture that differentiates it from competitors.
Zscaler is seeing strong momentum in emerging products like AI analytics, which contributed to new upsell business growth in the fourth quarter. The rise of generative AI (GenAI) is opening new growth avenues for the company. Roy noted that Zscaler’s GenAI security solution is gaining traction, helping customers secure AI deployments. The potential for AI-driven growth could be a significant tailwind in the coming years, especially as enterprises adopt more AI-powered solutions.
The federal market also offers growth potential for Zscaler. The company landed a new cabinet-level agency as a client in the fourth quarter, bringing the total to 13 out of 15 U.S. cabinet-level agencies. With governments worldwide adopting zero-trust security frameworks, Zscaler's foothold in the public sector is likely to expand.
Valuation and Technical Indicators: Concerns for ZS Stock
While Zscaler’s prospects are promising, its current valuation raises some concerns. Based on a one-year forward price-to-sales (P/S) ratio, ZS stock currently trades a way premium to the Zacks Internet – Services industry average, suggesting that much of its anticipated growth is already reflected in the stock price.
Image Source: Zacks Investment Research
Zscaler 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
Conclusion: Hold Zscaler Stock for Now
The 19% plunge in Zscaler's stock price on Wednesday is likely an overreaction to short-term profitability concerns. The growth prospect looks bright, considering the company’s strong market position, robust revenue growth and promising AI-driven initiatives. While the road may be bumpy in the near term, Zscaler is well-positioned to benefit from the growing demand for zero-trust security solutions and AI-driven cybersecurity products, making it a stock worth holding through volatility.
Image: Shutterstock
Zscaler Plunges 19% on Dim Profit Outlook: How to Play the Stock?
Zscaler, Inc. (ZS - Free Report) , a top-tier cloud security firm, saw its stock fall by 18.7% on Wednesday after releasing its fourth-quarter fiscal 2024 results. Despite showing impressive revenue and earnings growth, the market reacted negatively to a disappointing profit outlook.
This drop has understandably made investors wonder if it’s time to buy the dip or stay on the course.
Zscaler’s Revenue Growth and Market Position Remain Strong
Despite the market's negative reaction, Zscaler's fourth-quarter results weren't all bad news. Its revenues grew by 30% year over year, reaching $593 million, with full-year revenue growth at 34%. Billings grew by 27%, a testament to the strong customer demand for Zscaler’s Zero Trust Exchange platform. The firm also surpassed $1 billion in quarterly bookings, a new milestone, and reached $2.5 billion in annual recurring revenues (ARR).
Zscaler’s position as a leader in the zero-trust security market, securing more than 8,700 customers and protecting nearly 50 million users globally, underscores its deep penetration in the cybersecurity ecosystem. Its Zero Trust Exchange platform, which facilitates secure internet access and application usage, continues to attract high-demand clients, especially as enterprises adopt more hybrid cloud infrastructure.
While competitors like Palo Alto Networks (PANW - Free Report) , Fortinet (FTNT - Free Report) and CrowdStrike Holdings (CRWD - Free Report) also excel in cybersecurity, Zscaler’s cloud-native platform differentiates it in a rapidly evolving landscape where zero-trust architectures are becoming a security standard.
Intraday Price Return Performance
Image Source: Zacks Investment Research
Profitability Concerns: A Temporary Setback for ZS Stock?
The market’s sharp reaction stemmed largely from concerns over Zscaler’s profitability guidance for fiscal 2025. Despite reporting an operating margin of 22% and a free cash flow margin of 23% in the fourth quarter, Zscaler guided for billings growth to decelerate to 19%-20% in fiscal 2025, down from 27% in fiscal 2024. This slowdown is expected to compress profit margins, with a forecast of 20.6% for full-year operating margins falling short of analysts' expectations.
This shift in profitability is more about its aggressive investments in future growth, including expanding its artificial intelligence (AI) and cloud infrastructure capabilities, rather than a fundamental weakness in the business. CEO Jay Chaudhry emphasized that the company’s focus on AI-driven security and infrastructure expansion would be critical for long-term growth, even if it leads to short-term profitability pressures.
Zscaler has been enhancing its AI-driven analytics to provide deeper insights into security threats, driving more upselling opportunities. The company’s acquisition of Avalor and Airgap — both aimed at strengthening its AI and security capabilities — positions it for future growth in the rapidly evolving cybersecurity industry. In the near term, these investments may weigh on margins, but they position Zscaler for stronger growth over the next several years.
Market Dynamics Support Zscaler’s Prospects
Broader market dynamics support Zscaler’s growth outlook. The demand for zero-trust security platforms continues to grow, driven by the increasing frequency of cyberattacks and the need for businesses to secure their digital infrastructure. Zscaler is uniquely positioned to capitalize on this demand with a cloud-native architecture that differentiates it from competitors.
Zscaler is seeing strong momentum in emerging products like AI analytics, which contributed to new upsell business growth in the fourth quarter. The rise of generative AI (GenAI) is opening new growth avenues for the company. Roy noted that Zscaler’s GenAI security solution is gaining traction, helping customers secure AI deployments. The potential for AI-driven growth could be a significant tailwind in the coming years, especially as enterprises adopt more AI-powered solutions.
The federal market also offers growth potential for Zscaler. The company landed a new cabinet-level agency as a client in the fourth quarter, bringing the total to 13 out of 15 U.S. cabinet-level agencies. With governments worldwide adopting zero-trust security frameworks, Zscaler's foothold in the public sector is likely to expand.
Valuation and Technical Indicators: Concerns for ZS Stock
While Zscaler’s prospects are promising, its current valuation raises some concerns. Based on a one-year forward price-to-sales (P/S) ratio, ZS stock currently trades a way premium to the Zacks Internet – Services industry average, suggesting that much of its anticipated growth is already reflected in the stock price.
Image Source: Zacks Investment Research
Zscaler 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
Conclusion: Hold Zscaler Stock for Now
The 19% plunge in Zscaler's stock price on Wednesday is likely an overreaction to short-term profitability concerns. The growth prospect looks bright, considering the company’s strong market position, robust revenue growth and promising AI-driven initiatives. While the road may be bumpy in the near term, Zscaler is well-positioned to benefit from the growing demand for zero-trust security solutions and AI-driven cybersecurity products, making it a stock worth holding through volatility.
Currently, Zscaler carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.