Prepare For A Record-Setting Quarter For Cyber Security Stocks

The Internet Security Stocks have been in a deep correction all year because of fears of slowing growth but still, there is no sign of that yet—results from Checkpoint Software (NASDAQ: CHKP) to SentinelOne, Inc. (NYSE: S) prove that demand for cyber security is not only still strong but accelerating on many fronts. The latest news is from Zscaler, Inc (NASDAQ: ZS) which offers cloud-based cyber security solutions up to and including the enterprise level. The company just announced a top and bottom line beat and increased its guidance which is noteworthy not only because the sector is set to outperform in the Q3 and Q4 reporting period but because the entire sector has been lagging behind the S&P 500 since the pandemic bottom. That’s silly. Cyber security stocks are as fundamental to the outlook of the Internet and the digitization of business as any part of the IT picture, and demand is driven by a widespread and growing need for safety. Each time the good guys make an advancement the bad guys make one to match. 

Zscaler, Inc. Leads With Robust Results And Outlook 

The cyber security sector has been lagging behind the S&P 500 (NYSEARCA: SPY) since the pandemic bottom but Zscaler is clearly a winner leading both the group and the broader market. The stock is highly-valued at 238X its earnings but that is factoring in a wicked-hot growth rate that continues to underestimate the company’s strength. The $318.06 million in net revenue is up 61.4% over last year and beat the Marketbeat.com consensus figure by 400 basis points making this the 4th consecutive quarter of growth in the range of 61.4% to 62.75% range. The sequential growth is down a hair from the previous quarter but well above the consensus which leaves annualized growth at 62%, an acceleration from the previous year, and strength is expected to continue into the coming year. 

The margin news is a little mixed but ultimately bullish for the share prices. The GAAP and adjusted operating margins contracted versus last year but less than expected and due primarily to non-cash items. The GAAP margin contracted by 800 basis points and the adjusted margin by 200 and there are other favorable metrics to offset the shrinkage. Primarily, cash flow and FCF are both up from last, FCF by 24%, which bodes well for profitability over the long term. Turning to the guidance, the company issued guidance for Q1 F2023(calendar Q3 2022) and both the revenue and the earnings are in a range well above the consensus figures. 

The Analysts Are Driving Zscaler To New Heights 

The analysts are as bullish on this stock as they’ve been for the last 12 months pegging it at a Moderate Buy with a price target of $234. The $234 price target is down a bit from last year and even last month but has firmed significantly in the wake of the FQ4 report and guidance. At least 12 fresh reports have come out since the release and all include favorable commentary and pricing actions. Eleven of the new commentaries include price target hikes and the one price target reduction is to $275 compared to the $234 consensus target which is a full 50% above the pre-release price action. Analyst Dan Ives of Wedbush called the results impressive and says they provide much-needed relief for the market. 

The Technical Outlook: Zscaler Powers Higher On Impressive Results 

Zscaler shares have been in correction but bottoming over the past few months and now the market is in full reversal. The news and guidance have the shares up 15% in premarket trading with action aided by a moderately high 7.5% short interest. Assuming the market follows through on the signal, the stock should easily climb back above the 150-day EMA and regain the $180 level before the end of the year. In that scenario, momentum should build and drive the stock up to the consensus target if not higher. If not, Zscaler could become range bound with a top near $175.