Zscaler Inc (NASDAQ:ZS)
Trending stock of the day.
Zscaler, founded by Jay Chaudhry (Current CEO), in 2007, is a cloud-based security company. Zscaler’s Zero Trust Exchange, distributed worldwide across more than 150 data centres provides next generation “zero trust” network architecture that helps users connect to the internet/SaaS/internal applications securely. Other products like ZS for Workloads and ZDX are multi-tenant cloud-based monitoring platform for anorganization’s users. ZS stock witnessed an upward trajectory for almost a year. It more than doubled since May 2023. However, Zscaler is facing some hiccups in its smooth ride since last week. Fundamentally, the company is performing moderately as recorded in the latest financial quarter result.
Positive Hype
A few factors that are positively fuelling ZS hype are:
Upbeat quarter: Zscaler’s 2Q FY2024 revenues came in at $525.0 million, an increase of 35% year-over-year. EPS of $0.76 easily beat the company’s guidance of $0.57 to $0.58 and the Street’s estimate of $0.58. 2Q billings grew 27%. The solid results came on the heels of broad-based demand, solid execution, and operating leverage.
Upbeat Guidance: For FY3Q24, the company expects revenue to be in the range of $534.0-$536.0 million. EPS is expected to come in the range of $0.64-$0.65. We note that the company expects 3Q FY2024 billings to be down 7% quarter-over-quarter, consistent with its historical seasonal patterns. Zscaler increased its FY2024 revenue guidance to be between $2.11 billion and $2.12 billion. Previously, the company expected to ring in revenue between $2.0 billion and $2.1 billion. EPS is expected in the range of $2.73-$2.77, higher than prior guidance of $2.45 and $2.48. Revised guidance is lower than the Street’s.
Monetizing opportunities: ZS continues to see traction for its zero-trust security transformations among Federal and enterprise (especially Healthcare) customers, which is driving increasing adoption of its product portfolio. The company recently released its Zero Trust SASE.
Capitalizing through cross-selling and upselling: ZS is expected to gain share within its large and expanding TAM across SSE/CNAPP markets. Upselling and cross selling of products and services is projected to benefit the company in near to long term.
Negative Hype
Challenging macro environment: ZS has been witnessing macroeconomic challenges from the dual pressures of high inflation and interest rate hikes, affecting demand for its products. Customer scrutiny to continue large deals.
Trade-off between growth and profit margins: ZScaler went on a hiring spree in 2Q, primarily in Research & Development and Sales & Marketing. This will limit operating margin from expanding in the near-term. Moreover, investment in cloud infrastructure will also pin the profit margins down.
Conclusion
ZScaler's has a highly scalable architecture. It is well positioned given its technological leadership as a zero-trust platform to disrupt and potentially transform multiple IT network and security markets over time. The company can tap into large market opportunities through its evolving product portfolio, beating competition. Strong adoption of cloud-based network solutions is expected to playout positively in FY2024. ZS is expected to gain share within its large and expanding TAM across SSE/CNAPP markets. Upselling and cross selling of products and services is projected to benefit the company in near to long term.