Zscaler, Inc Is About To Scale A New All-Time High

Zscaler Is The Right Solution For A Growing Problem

Zscaler NASDAQ: ZS was among the most perfectly positioned companies for the pandemic. The company’s zero-trust approach for today’s cloud-based and IoT-connected networks has proven to be highly successful and is sustaining a high level of demand. The Q4 2021 results may have shown a slight sequential deceleration in growth but we're not worried about it.  Even with the 300 basis point deceleration, Zscaler is growing at a rate greater than 50% year-over-year on a quarter-to-quarter basis and the internal metrics suggest that the pace of growth will continue. Shares of the stock are down in the wake of the report but we view the pullback as a buying opportunity and the analysts seem to agree with us.

Data from Marketbeat.com shows that no less than 16 sell-side analysts have come out with commentary in the wake of the earnings release and all has been positive. While there were no rating upgrades, the consensus is a Buy verging on Strong Buy with a noticeable uptrend in the consensus price target. In regards to the consensus price target, all 16 of the analysts increased their price target putting the consensus at $292 or 10% above the recent price action. The high price target of $345 assumes an upside of 27% and that may still be a low estimate. If price action is able to consolidate at the current level and break out to a new high, technical indications suggest the stock could rise as much as $100 by the end of the year.

Mixed Results Send Zscaler Moving Lower

Zscaler reported a mixed quarter but only in regards to the analyst consensus for earnings and there is a mitigating factor to be aware of. While the GAAP earnings of -$0.59 are $0.14 worse than expected, the primary culprit is an increase in sales and marketing expenses. In our view, an increase in marketing dollars can only aid this company moving forward and should result in continued high levels of growth. 

Moving back to the top line, the company's revenue of $197.10 is up 56.6% over last year and beat the consensus estimate by 500 basis points. The gains are driven by an increase in large contracts that help to drive revenue up by 135% over the past two years. Moving down to the bottom line, on an adjusted basis, the company's earnings of $0.14 beat the consensus by a nickel despite the shortfall in GAAP earnings.

Internal metrics suggest that revenue strength will not only continue in the coming quarter but may reaccelerate as well. The company reports calculated billings and deferred revenue are both up 70% from the last year and have guided the first quarter and full-year 2022 revenue estimates higher because of it. The company is expecting fiscal 2022 Revenue to come in a range of $940 to $950 versus the $910 consensus and we expect to see them guide higher again later in the year. As for earnings, the company is expecting $0.52 to $0.56 in earnings versus the consensus of $0.55 but there is an expectation for share base compensation to increase the share count. That may make the earnings estimates uncomparable, regardless, revenue and earnings growth will continue in fiscal 2022.

The Technical Outlook: Zscaler Is Pulling Back From A Peak

Shares of Zscaler have been pulling back from a peak set in the wake of the Q4 earnings release. The pullback is driven by profit-taking and short-selling that we think underestimate the company and the stock value. In our view, the uptrend is still intact and support should be strong at the $260 level if not higher.  Longer-term, we expect to see this stock move sideways within a range over the next few weeks to a month or two before resuming in the uptrend and breaking out to new highs. Based on the last rally, worth about $100, we think the stock could easily move up above$350 and into the $375 range.