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Is Zscaler Stock a Buy, Sell or Hold at a P/E Multiple of 57.67X?
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Zscaler, Inc. (ZS - Free Report) is one of the standout companies in the cybersecurity sector, known for its high-growth trajectory. However, its current price-to-earnings (P/E) multiple of 57.67X raises concerns about whether the stock's valuation is justified. This multiple is significantly higher than the Zacks Internet – Services industry average of 20.9X, making the stock seem expensive in comparison. Zscaler's price-to-sales (P/S) ratio also adds to investor unease, especially when considering the company’s recent performance.
Image Source: Zacks Investment Research
While Zscaler's share price has declined by 22.3% year to date, many investors are questioning whether this dip presents a buying opportunity or if the stock is still too expensive. In high-growth sectors like cybersecurity, premium valuations are often justified when explosive growth is on the horizon. But with Zscaler’s slowing revenue growth, many are left wondering if the stock’s premium pricing can still be supported.
YTD Price Return Performance
Image Source: Zacks Investment Research
Zscaler’s Elevated Valuation Raises Concerns
At 57.67X P/E, Zscaler is trading at a valuation much higher than its competitors. Its competitors, such as Palo Alto Networks, Inc. (PANW - Free Report) , Fortinet, Inc. (FTNT - Free Report) and Check Point Software Technologies Ltd. (CHKP - Free Report) , which are delivering solid growth and innovation, trade at more reasonable multiples. PANW, FTNT and CHKP have a forward P/E of 52.69X, 36.17X and 19.54X — all significantly lower than Zscaler. Despite being a leader in the zero-trust security space, Zscaler's valuation seems out of step with its growth trajectory, especially given its share price decline this year.
The stock's elevated valuation reflects high investor expectations for future growth. However, when compared to these competitors, Zscaler looks increasingly vulnerable in an environment where market participants are growing cautious about overpriced tech stocks. The company’s ability to meet or exceed these lofty expectations is crucial in justifying its premium pricing.
Zscaler’s Slowing Growth Rates Are Concerning
One of the key reasons for Zscaler’s struggles is its slowing revenue growth. In its latest fourth-quarter fiscal 2024 results, Zscaler posted a 30% year-over-year revenue increase. While that might seem impressive at first glance, it’s a noticeable drop from the 40%-plus growth rates Zscaler delivered in previous years.
The company’s guidance for fiscal 2025 is not encouraging. Zscaler expects its sales growth to decelerate further, forecasting around 20.5% growth for the year. Billings growth is projected to be 19%-20%, down from the 27% growth in fiscal 2024. The slowing momentum is likely to compress margins, with Zscaler guiding for a fiscal 2025 operating margin of 20.5%, which falls below Wall Street analysts' expectations.
Image Source: Zacks Investment Research
For a company trading at such a premium valuation, this deceleration in growth is troubling. It signals that Zscaler may be transitioning out of its high-growth phase, and its current valuation might not be sustainable unless growth accelerates once again.
Zscaler’s Investments Could Fuel Long-Term Growth
Despite its slowing growth rates, Zscaler’s long-term prospects remain intact. The company is aggressively investing in expanding its artificial intelligence (AI) capabilities and cloud infrastructure, positioning itself for future growth. While these investments may pressure profitability in the short term, they are designed to capture new market opportunities.
Zscaler has made strategic acquisitions, including Avalor and Airgap, to bolster its AI-driven analytics and security capabilities. These moves aim to enhance Zscaler’s ability to identify and mitigate security threats, creating more upsell opportunities with existing customers. During the most recent earnings call, CEO Jay Chaudhry emphasized the importance of these investments for the company’s future, even if they weigh on near-term profitability.
By investing heavily in AI and cloud infrastructure, Zscaler is aligning itself with key trends in the cybersecurity space. AI-driven cybersecurity solutions are expected to play a crucial role in protecting against increasingly sophisticated cyber threats. In the long run, these investments could reignite growth and justify the stock’s premium valuation.
Market Dynamics Support Zscaler’s Future
The demand for cybersecurity solutions remains robust, driven by the rising frequency of cyberattacks and the need for stronger digital infrastructure security. Zscaler’s cloud-native platform differentiates it from competitors, allowing it to offer a more agile and scalable solution for enterprises looking to adopt zero-trust security models.
The company is seeing strong momentum in its AI-driven analytics products, which contributed to new upsell business in the fourth quarter of fiscal 2024. Generative AI (GenAI) is another growth avenue for Zscaler, with its security solutions gaining traction in helping companies secure their AI deployments.
Zscaler’s position in the federal sector is growing. The company secured another cabinet-level agency client in the fourth quarter, bringing its total to 13 out of 15 U.S. cabinet-level agencies. As more governments worldwide adopt zero-trust security frameworks, Zscaler’s presence in the public sector could expand, providing a stable growth stream.
Conclusion: Hold Zscaler Stock for Now
Zscaler’s premium valuation and slowing growth rates raise valid concerns for investors. While the stock may appear overvalued in the current market environment, the company's long-term growth prospects, particularly in AI and cloud-driven cybersecurity, remain compelling. Zscaler’s strategic investments in AI and its strong positioning in the zero-trust security market provide a solid foundation for future growth.
For now, holding Zscaler stock is the most prudent strategy. Investors should monitor how Zscaler executes its AI initiatives and whether these investments translate into stronger growth in the years ahead. While the stock may face near-term volatility, its long-term potential makes it worth holding on to for now. Zscaler currently 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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Is Zscaler Stock a Buy, Sell or Hold at a P/E Multiple of 57.67X?
Zscaler, Inc. (ZS - Free Report) is one of the standout companies in the cybersecurity sector, known for its high-growth trajectory. However, its current price-to-earnings (P/E) multiple of 57.67X raises concerns about whether the stock's valuation is justified. This multiple is significantly higher than the Zacks Internet – Services industry average of 20.9X, making the stock seem expensive in comparison. Zscaler's price-to-sales (P/S) ratio also adds to investor unease, especially when considering the company’s recent performance.
Image Source: Zacks Investment Research
While Zscaler's share price has declined by 22.3% year to date, many investors are questioning whether this dip presents a buying opportunity or if the stock is still too expensive. In high-growth sectors like cybersecurity, premium valuations are often justified when explosive growth is on the horizon. But with Zscaler’s slowing revenue growth, many are left wondering if the stock’s premium pricing can still be supported.
YTD Price Return Performance
Image Source: Zacks Investment Research
Zscaler’s Elevated Valuation Raises Concerns
At 57.67X P/E, Zscaler is trading at a valuation much higher than its competitors. Its competitors, such as Palo Alto Networks, Inc. (PANW - Free Report) , Fortinet, Inc. (FTNT - Free Report) and Check Point Software Technologies Ltd. (CHKP - Free Report) , which are delivering solid growth and innovation, trade at more reasonable multiples. PANW, FTNT and CHKP have a forward P/E of 52.69X, 36.17X and 19.54X — all significantly lower than Zscaler. Despite being a leader in the zero-trust security space, Zscaler's valuation seems out of step with its growth trajectory, especially given its share price decline this year.
The stock's elevated valuation reflects high investor expectations for future growth. However, when compared to these competitors, Zscaler looks increasingly vulnerable in an environment where market participants are growing cautious about overpriced tech stocks. The company’s ability to meet or exceed these lofty expectations is crucial in justifying its premium pricing.
Zscaler’s Slowing Growth Rates Are Concerning
One of the key reasons for Zscaler’s struggles is its slowing revenue growth. In its latest fourth-quarter fiscal 2024 results, Zscaler posted a 30% year-over-year revenue increase. While that might seem impressive at first glance, it’s a noticeable drop from the 40%-plus growth rates Zscaler delivered in previous years.
The company’s guidance for fiscal 2025 is not encouraging. Zscaler expects its sales growth to decelerate further, forecasting around 20.5% growth for the year. Billings growth is projected to be 19%-20%, down from the 27% growth in fiscal 2024. The slowing momentum is likely to compress margins, with Zscaler guiding for a fiscal 2025 operating margin of 20.5%, which falls below Wall Street analysts' expectations.
Image Source: Zacks Investment Research
For a company trading at such a premium valuation, this deceleration in growth is troubling. It signals that Zscaler may be transitioning out of its high-growth phase, and its current valuation might not be sustainable unless growth accelerates once again.
Zscaler’s Investments Could Fuel Long-Term Growth
Despite its slowing growth rates, Zscaler’s long-term prospects remain intact. The company is aggressively investing in expanding its artificial intelligence (AI) capabilities and cloud infrastructure, positioning itself for future growth. While these investments may pressure profitability in the short term, they are designed to capture new market opportunities.
Zscaler has made strategic acquisitions, including Avalor and Airgap, to bolster its AI-driven analytics and security capabilities. These moves aim to enhance Zscaler’s ability to identify and mitigate security threats, creating more upsell opportunities with existing customers. During the most recent earnings call, CEO Jay Chaudhry emphasized the importance of these investments for the company’s future, even if they weigh on near-term profitability.
By investing heavily in AI and cloud infrastructure, Zscaler is aligning itself with key trends in the cybersecurity space. AI-driven cybersecurity solutions are expected to play a crucial role in protecting against increasingly sophisticated cyber threats. In the long run, these investments could reignite growth and justify the stock’s premium valuation.
Market Dynamics Support Zscaler’s Future
The demand for cybersecurity solutions remains robust, driven by the rising frequency of cyberattacks and the need for stronger digital infrastructure security. Zscaler’s cloud-native platform differentiates it from competitors, allowing it to offer a more agile and scalable solution for enterprises looking to adopt zero-trust security models.
The company is seeing strong momentum in its AI-driven analytics products, which contributed to new upsell business in the fourth quarter of fiscal 2024. Generative AI (GenAI) is another growth avenue for Zscaler, with its security solutions gaining traction in helping companies secure their AI deployments.
Zscaler’s position in the federal sector is growing. The company secured another cabinet-level agency client in the fourth quarter, bringing its total to 13 out of 15 U.S. cabinet-level agencies. As more governments worldwide adopt zero-trust security frameworks, Zscaler’s presence in the public sector could expand, providing a stable growth stream.
Conclusion: Hold Zscaler Stock for Now
Zscaler’s premium valuation and slowing growth rates raise valid concerns for investors. While the stock may appear overvalued in the current market environment, the company's long-term growth prospects, particularly in AI and cloud-driven cybersecurity, remain compelling. Zscaler’s strategic investments in AI and its strong positioning in the zero-trust security market provide a solid foundation for future growth.
For now, holding Zscaler stock is the most prudent strategy. Investors should monitor how Zscaler executes its AI initiatives and whether these investments translate into stronger growth in the years ahead. While the stock may face near-term volatility, its long-term potential makes it worth holding on to for now. Zscaler currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.