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Zscaler Stock Sells Off After Earnings, Experts See 20% Upside

Cybersecurity company Zscaler reported impressive fiscal Q1 results, but shares sank 8% after earnings. Despite the selloff, Wall Street still sees double-digit gain potential in ZS stock.

Zscaler stock  (ZS) - Get Zscaler, Inc. Report is on the move. One of the most anticipated companies to report earnings this week topped expectation for fiscal first quarter results on November 30. Zscaler, a cloud security leader, proved once again its financial strength and growth potential.

However, the stock did not perform according to Q1 numbers. Shares gave up a positive 6% premarket move and turned sharply negative by the end of the December 1 trading session: -8%.

Figure 1: ZS stock performance in the past 5-trading days.

Figure 1: ZS stock performance in the past 5-trading days.

Several Wall Street analysts updated their ratings after earnings day. The consensus on the stock is still bullish, as experts forecast a 20% price climb ahead. Today, we take a closer look at ZS.

Solid fiscal Q1 results

Zscaler reported earnings per share and revenue beats as usual — the company has not failed to do so since 2018. This time, revenues of $230.5 million topped consensus by $18 million, while EPS of $0.14 cents landed 2 cents above expectations.

Among the highlights were revenues growing 62% YoY and calculated billings climbing 71% from 2020 levels. However, loss from operations was equal to 32% of total revenue compared to 30% in the first fiscal quarter of 2021.

Jay Chaudhry, Chairman and CEO of Zscaler, spoke on the company’s performance:

“We delivered outstanding results for the first quarter […]. We recently achieved a significant milestone of surpassing $1 billion in annual recurring revenue (ARR), and are now focusing on achieving $5 billion in ARR.”

Guidance for the next quarter was also provided. Zscaler is expecting revenue to be between $240 million and $242 million, while estimates sat lower at $212.3 million. Billings are expected to be around $1.3 billion.

Wall Street is bullish on ZS stock

Wall Street’s consensus on ZS stock is moderately bullish. The stock has been highly covered by analysts and 20 of them raised their price targets after Zscaler’s earnings. Based on 27 reports issued in the past three months, ZS has an average price target of $389, suggesting 20% upside.

Wedbush’s Dan Ives sees ZS heading to $400 from $320 for 25% gain potential. The analyst called Zscaler’s earnings a “jaw dropper”, noting impressive revenue and billings growth that landed well above Wall Street’s estimates. He also called Zscaler "the best pure play in the cloud security arena”.

Another bull is BTIG’s Gary Powell. He also raised his price target to $439 from $401, suggesting 37% upside. Powell said that Zscaler is “firing on all cylinders right now”, citing the adoption of cloud-based security architectures and high demand for core products like ZIA and ZPA.

A bit more skeptical is Piper Sandler’s Rob Owens, who raised the price target to $365 from $285 for a modest projected climb of 5%. Owens see Zscaler executing well on key growth initiatives, which led to “the most significant revenue beat in nearly three years”.

But why did ZS stock plummet?

Between pre-market action and the end of the trading session, Zscaler share price swung about 14 percentage points lower. The most probable cause were broad market forces. Omicron variant fears hit markets worldwide, and the first case was discovered in the US on Wednesday.

See below the past-week moves of the S&P 500  (SPY) - Get SPDR S&P 500 ETF Trust Report and of two ETFs with 8% and 7% exposure to ZS stock, respectively: Global X Cybersecurity ETF (BUG) and TrueShares Technology, AI & Deep Learning ETF (LRNZ).

Figure 2: ZS, SPY, BUG and LRNZ performance in the past 5-trading days.

Figure 2: ZS, SPY, BUG and LRNZ performance in the past 5-trading days.

Should Zscaler’s poor trading performance on December 1 be merely a function of broad market-driven deterioration in sentiment, this could prove to be a temporary headwind and a buy-the-dip opportunity. The company’s business fundamentals look as strong as ever. Investors seem to have taken notice, as ZS stock was up more than 3% by mid-session on December 2.

Is the price right?

Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)