Zscaler, Inc. Is Scaling The Wall Of Worry

 Zscaler, Inc. Still Accelerating, Shares Pop

Zscaler, Inc. NASDAQ: ZS emerged as a mega win in 2020. Its position as a cloud-based Internet Security provider made it a go-to company for businesses around the world. Not only did the pandemic accelerate the use of digital it cemented the need for businesses to use digital, the internet, and the cloud. The problem for shares of Zscaler, Inc. was just how good the company performed. High double-digit YOY Revenue gains, sequential Revenue growth, and accelerating revenue can only be sustained for so long. The biggest worry was the comps. Now that we're deep into the time frame comparable to the onset of the pandemic the comps for many of the pandemically supported businesses are going to become very hard. But apparently, not for Zscaler, Inc., it's still accelerating.

 Zscaler, Inc. Surges After Blowout Q3 Earnings

 Zscaler, Inc. had a fantastic third quarter. The company reported $176.4 million in consolidated revenue for 60% growth over last year.  The revenue is up 12% from the previous quarter and YOY growth is accelerating. Based on the company's reported calculated billings growth and deferred revenue growth it looks like revenue growth will continue to accelerate for at least one more quarter. The calculated Billings grew 71% year-over-year to $225 million while deferred revenue grew 65% year-over-year to $495.4 million. Very impressive.

Perhaps even better, the company's margins widened as well. Cash provided by operating came in at $73.4 million or 42% of Revenue compared to only 19% of Revenue in the same time frame last year. Within that, free cash flow came in at $55.8 million or about 31.6% of revenue to set a company record. The bottom-line results were a little mixed but in a good way. The company's GAAP eps of -$0.43 missed the consensus by a penny which isn’t very bad while the non-GAAP EPS of $0.15 beat by 8 cents. 

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“Our Zero Trust Exchange platform is helping customers realize their digital transformation goals and architect for the new normal of the work-from-anywhere economy," said Jay Chaudhry, Chairman, and CEO of Zscaler, Inc. "Our strategic position with customers continues to strengthen, and we are executing well on our go-to-market initiatives. With strong business momentum, we are pleased to again increase our fiscal year guidance."

Looking forward the company is expecting to see fourth-quarter revenue and the range of $185 to $187 million dollars. This tops the consensus by more than $10 million at the low end of the range and should drive EPS in the range of $0.08 to $0.09. While the EPS guidance is in line with the consensus estimate it does not reflect how the third quarter impacted the full year. The full-year guidance assumes an adjusted EPS of $0.47 compared to the prior range of $0.39 to $0.40 and the consensus of $0.40. This guidance also does not include the impact of recent acquisitions or plans to acquire Smokescreen Technologies. 

The Analysts Love Zscaler, Inc.

The analysts we're already in love with Zscaler, Inc., and the Q3 results have only deepened the attraction. At least five major sell-side analysts have already come out with notes upgrading or upping their price targets in the wake of the Q3 report. BMO Capital upgraded from Market-Perform to Outperform with a price target of $225 compared to the consensus target of $200. The high price target of $245 was set by Needham & Company and assumes nearly 25% upside even with today's pop.

Looking at the chart it appears as if Zscaler, Inc. is about to move back up and retest its recently set all-time high. The stock is tracing out a double bottom reversal at the 158 level that will be confirmed when price action moves above $200. At that point, the all-time high near $225 is the next best target but we expect to see that exceeded very quickly.