ZScaler Is On The Brink Of Reversal

Key Points

• Zscaler is on the brink of a reversal that could add 33% to shares this year. 
• The analysts are driving the market and should continue to do after the CQ2 report. 
• Others in the industry will report before Zscaler and may telegraph news to catalyze the market. 

Among other cybersecurity stocks, ZScaler NASDAQ: ZS has been trying to effect a rebound and reversal all year. The industry has struggled to gain momentum, but that may be ending. It’s been about a month since the company’s FQ3/CQ strong earnings report, and the chart looks as bullish as ever.

The market is supported by analysts who have been upping targets; if these trends continue, shares of the stock will break critical resistance soon. In this scenario, FOMO could drive the market up to the $200 level or higher, a gain of roughly 33%, and the move could turn into a sustained rally if the coming report is as good as it could be. 

The only negative in the revenue outlook is that growth will slow in FQ4. The takeaway is that revenue will grow by at least 35% YOY, with a solid chance for outperformance.

The company displays momentum in its business, and, despite the trend of upward revisions among analysts, the bar could be set low. Among the many trends driving Zscaler’s business is the shift away from VPNs. VPNs are used to ensure privacy and network security but can be a cumbersome product, and they are a 3rd-party service.

The shift is still in its infancy, but other 0-Trust providers, such as Cloudflare NYSE: NET, are leaning into the application. Zscaler also relies heavily on AI. 

Zscaler Is Beating Consensus Estimates 

Zscaler beat the Marketbeat.com consensus estimate for revenue and earnings for 5 consecutive quarters and has only missed once in the last 2 years. The analysts have been upping their estimates for the current quarter, but the odds are high that Zscaler will outperform again.

Until then, the analysts' sentiment trend is bullish and supports the price action. There have only been upward price target revisions and new, bullish coverage since the Q3 report, enough to get the stock on the Most Upgraded Stocks list, and that trend is expected to continue after the Q4 release. 

The opportunity is that the price target, which is firming compared to the low set last quarter, is still low. The analysts view the stock as fairly valued, trading near $172, but the bias is upward. The most recent targets include a high of $200, and most are above the consensus.

As it is, the $172 target is about 10% above the current price action and high enough that it might trigger a technical reversal. There is an 8% short interest which isn’t high but high enough to aid a rally with short-covering. 

The institutions may produce a headwind for the stock going forward. They have been selling into rallies over the past year and play a large role in the stock's current price.

The market will have difficulty moving above critical resistance points if this continues. The institutions own about 45% of the stock, so they have ample ammunition to hold the market back for the foreseeable future. 

More Catalyst Than One, On The Horizon

ZScalers next big catalyst will be when it reports earnings on September 8th. The good news is that several other cybersecurity companies will report before then and may telegraph the news. Checkpoint Software NASDAQ: CHKP is among the first; it reports in late July and will be followed by Cloudflare in early August and Palo Alto Networks NASDAQ: PANW in late August. 

On a technical basis, the chart shows promise, but there is resistance ahead. If the market can get above $158, it may increase to the $200 region. That is the next major hurdle and may cap gains. In that scenario, the market may remain range bound until later in the year or early in 2024.