Zscaler’s Potential Upside Continues to Explode

Key Points

• Zscaler shares have continued to fall since March’s earnings despite smashing expectations. 
• They’ve also had a run of bullish analyst upgrades and been given lofty price targets. 
• If shares can form a low and consolidate around it, then things could get interesting pretty quickly.

For a stock that was just starting to experience what a 200% rally felt like, the past month has sure been a wake-up call for Zscaler Inc NASDAQ: ZS. Having caught the wave of risk-on sentiment that began to sweep equity markets in November, the cyber-security tech stock was unable to maintain the momentum through the end of Q1. This was even as the broader market, and other tech stocks in particular continued to see gains. 

Sure, the benchmark S&P 500 index is currently experiencing its worst selloff of the year, as inflation threatens to make a comeback, but that only started three weeks ago. Zscaler’s 35% drop since the start of February serves as its own reminder to investors: just as tech stocks can outpace the market in a rally, they can undoubtedly outpace it in a selloff. 

However, with Zscaler’s stock’s relative strength index (RSI) in the low 20s, indicating extremely oversold conditions, the question has to be asked: could we be looking at the mother of all entry opportunities? 

Reasons to be Bullish

Beyond the technical indicators supporting this thesis, there are the fundamentals to consider. Zscaler smashed analyst expectations for their Q2 earnings last month, reporting both a record revenue and earnings per share print. The company also boosted its forward guidance for the entire year, ahead of the consensus; something in and of itself is usually enough to spark a fiery rally. 

But instead, Zscaler shares have continued to sink and dipped to a new low during Friday’s session. This has not only undone a large portion of the recovery rally that had been underway since May of last year, but it’s also put them back trading at 2020 levels.  

However, even though the tape might tell its own story, the Wall Street analysts aren’t buying it. Since the start of last month, there’s been a run of bullish analyst upgrades, comments, and price targets on the stock that all point to an upside potential that’s only increasing. 

Run of Analyst Upgrades

Take JMP Securities, for example, who, in the aftermath of Zscaler’s knockout earnings, reiterated their Market Outperform rating and gave the stock a price target of $270. Rosenblatt Securities took a similar stance, only with a price target of $290. As Zscaler shares have continued to trade down in the weeks since, the teams at Robert W. Baird, Truist, Macquarie, and KeyCorp have all joined the bull camp, and all have price targets well up in the $200s. 

For those of us on the sidelines, this gives some exciting pause for thought. Zscaler shares closed out last week under $170; against Rosenblatt’s price target of $290, that’s pointing to an upside of 70%. Taking even one of the more recently refreshed price targets, like KeyCorp’s $220 last Thursday, investors can be targeting at least 30% of gains in the near term. 

Getting Involved

With both the technical indicators and strong fundamental performance underpinning these lofty price targets, there’s a lot to like about Zscaler right now. There’s no doubt that the stock has gotten caught up in the risk-off sentiment that is shaving month’s worth of gains from equities in just a few weeks, but this is a tech stock that can actually point to some genuinely impressive growth and momentum in all the right spots. If nothing else, consider this: since the first time Zscaler traded at these prices back in 2020, its revenue has more than quadrupled while posting consistent quarter-on-quarter growth.   

In terms of picking a starting point, those of our readers considering a position should watch for a strong day of gains to initiate a bottom. If Zscaler shares can begin to consolidate above that low, if not altogether start an immediate recovery rally, we could be looking at a reasonably strong entry opportunity to take advantage of.