Zscaler, Inc Is Going Ballistic, It’s Not Too Late To Hitch A Ride

Blowout Results Drive Zscaler, Inc To New Heights 

If you had any doubts about the growing use of the Internet, the need for digital business security or 0-trust infrastructures Zscaler’s NASDAQ: ZS results should lay them to rest. Zscaler’s FQ1 results are so strong they defy belief. The results are driven by accelerating demand for the company’s 0-trust solutions and pushing the stock price higher. Wedbush analyst Dan Ives noted the company’s pure-play and leadership position within the 0-trust community when he raised the company’s price target for the stock. He upped the target by 25% to $400 which isn’t even the high price target among analysts. 

No fewer than 12 analysts have come out with commentary in the wake of the earnings report and it is all bullish. All 12 came with a price target increase and one a rating upgrade to Outperform putting the Marketbeat.com consensus at Weak Buy with a price target of $339. The Weak Buy rating is noteworthy because it leaves plenty of room for additional upgrades to market sentiment. The consensus price target is noteworthy because it is up 157% YOY, 44% over the past 90 days, and up 16% in the last month and it is still lagging the price action. The bulk of the new targets, however, are in the range of $390 to $439 which suggests price action will hit $400 or about 15% upside from the current price action. 

What’s The Big Deal With Zscaler? 

The big deal with Zscaler is the nature of its security services and their efficacy versus ransomware and other cloud-oriented attacks. The company’s revenue and earnings are all the proof we need having risen 61.7% versus last year to $230.52 million and a new company record. The real sign of strengths, however, is that revenue growth accelerated to the fastest pace in the company’s history and outpaced the Marketbeat.com consensus by 860 basis points. The best news, however, is in the billings and deferred revenue which both point to another accelerating in the current quarter. Billings are up 71% while deferred revenue rose 74% with ARR topping the $1 billion mark. 

Moving down the report, the company delivered an increase in gross margin as well and that is helping to juice market sentiment. Gross margin widened by 200 basis points and resulted in better than expected adjusted earnings on the bottom line. The adjusted EPS of $0.14 is flat versus last year but beat the consensus by $0.02. The only bad news is that the company’s GAAP loss widened and was more than expected at $0.65 per share. The mitigating factors include R&D, investment in growth, and stock-based compensation. As far as R&D and investment go, spending on sales and marketing is up more than 50% while R&D has more than doubled. In our view, both of these expenses will result in further growth. 

The Technical Outlook: Zscaler Uptrend Is Intact

Shares of Zscaler popped more than 5% at the open following the earnings release and guidance but immediately fell under the weight of profit-taking. The open had shares trading at the current all-time high, a level we see surpassed in the very near future. The price action is still well above support at the $335 level and, on the longer-term weekly charts, looks like consolidation in progress. If this scenario plays out we expect to see price action break out to the upside and move on to set new highs. If not, price action may pull back to $320 and possibly $280 where they would be even more attractive to us.