Is Zscaler (ZS) Stock Worth Buying Ahead of Q3 Earnings?

Zscaler ZS is scheduled to release third-quarter fiscal 2024 results on May 30.

Zscaler, a leader in the zero-trust security model, has demonstrated strong financial performance and innovative advancements. The company’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 28.2%.

For the third quarter, Zscaler projects total revenues between $534 million and $536 million. The Zacks Consensus Estimate is pegged at $535.6 million, which indicates growth of 27.9% from the year-ago quarter's level.

Zscaler anticipates non-GAAP earnings per share between 64 cents and 65 cents. The Zacks Consensus Estimate for the bottom line is pegged at 65 cents per share, which calls for a 35.4% increase from the year-ago quarter’s level of 48 cents.

Zscaler's year-to-date (YTD) share price performance has been marked by significant volatility, reflecting broader market fluctuations and company-specific developments. YTD, ZS stock has declined 22.5%, underperforming the Zacks Internet – Services industry’s growth of 20.5%.

As Zscaler approaches its third-quarter earnings announcement, let’s examine whether now is the right time to buy its shares.

Zscaler, Inc. Price and EPS Surprise Zscaler, Inc. Price and EPS Surprise

Zscaler, Inc. price-eps-surprise | Zscaler, Inc. Quote

Financial Performance & Growth Prospects

Zscaler has demonstrated impressive financial performance in recent quarters. For the second quarter of fiscal 2024, the company’s revenues soared 35% year over year to $525 million, while non-GAAP earnings of 76 cents per share jumped more than twofold from the year-ago quarter’s earnings of 37 cents.

The strong quarterly performance was driven by an expanding customer base and the increased adoption of its platform. Zscaler's billings, a key indicator of future revenues, also grew significantly, highlighting the company's strong market traction. With a robust pipeline and continued demand for its services, we are optimistic about Zscaler's third-quarter earnings results.

Zscaler's guidance for fiscal 2024 has been optimistic, too, projecting revenues between $2.118 billion and $2.122 billion, which indicates year-over-year growth of 31% at the midpoint. It forecasts to post non-GAAP earnings in the band of $2.73-$2.77 per share, which implies growth of 52-55%. This outlook suggests continued confidence in the business's ability to capture market share and expand its customer base.

The Zacks Consensus Estimate for fiscal 2024 revenues and non-GAAP earnings is pegged at $2.12 billion and $2.73 per share, respectively. This indicates a year-over-year improvement of 31.2% in the top line and 52.5% in the bottom line. Moreover, the long-term expected earnings growth rate currently stands at 28.1%, which is slightly higher than the industry’s average growth of 23.2%.

Fundamental Growth Drivers

Zscaler is benefiting from the rising demand for security and networking products amid the growing hybrid working trend. More people logging into employers' networks requires a greater need for security. This trend is positively impacting demand for Zscaler’s products. Moreover, its Edge cloud for policy enforcement, multi-tenancy, proxy for Secure Sockets Layer or Transport Layer Security inspection and zero-trust network access are well-poised to gain adoption amid the thriving remote work culture.

One of Zscaler’s significant strengths is its ability to attract and retain a diverse customer base. The company serves a broad range of industries, including finance, healthcare, manufacturing and government. Zscaler's customer-centric approach and ability to deliver tailored security solutions have resulted in high customer satisfaction and loyalty.

At the end of the second quarter of fiscal 2024, the company had 497 customers with $1 million or higher annualized recurring revenues (ARR). The company added 29 customers during the quarter with $1 million or more in ARR. Its customer count for ARR of more than $100,000 reached 2,820 at the end of the second quarter. As Zscaler continues to expand its customer base, it is well-positioned to achieve sustained revenue growth.

Zscaler's commitment to innovation is another critical factor driving its success. The company continually enhances its platform with new features and capabilities to address emerging security challenges. Recent initiatives, such as the introduction of Zscaler Digital Experience (“ZDX”) and advancements in its Zero Trust Exchange platform, underscore its focus on innovation. These efforts are aimed at providing customers with advanced security solutions that ensure seamless and secure digital transformation.

Zscaler’s strategic acquisitions also play a vital role in strengthening its product portfolio and market position. Most recently, in March 2024, it acquired Avalor, which is expected to expand Zscaler's Zero Trust Exchange data, incorporating more than 150 pre-built integrations to empower customers in proactively identifying and predicting critical vulnerabilities while enhancing operational efficiencies.

Strong Partner Base Aids Prospects

Zscaler’s strategic partnerships with major technology providers, including Microsoft MSFT, Amazon’s AMZN Amazon Web Services (“AWS”) and Alphabet’s GOOGL Google Cloud, have further bolstered its market presence and enhanced cloud security offerings.

Zscaler’s collaboration with Microsoft involves integrating its Zero Trust Exchange platform with Microsoft Azure Active Directory. This integration ensures secure, seamless access to applications and data, reinforcing cybersecurity for organizations leveraging Microsoft’s cloud infrastructure.

With Amazon’s AWS, Zscaler offers advanced security solutions tailored for AWS environments. This partnership enables customers to securely migrate and operate within the AWS cloud, ensuring data and applications are protected.

Zscaler’s alliance with Alphabet’s Google Cloud integrates its security solutions with Google’s infrastructure, offering comprehensive protection for users. This partnership facilitates secure access to applications and data, enhancing security for organizations utilizing Google’s cloud services.

These strategic alliances with Microsoft, Amazon and Alphabet enable Zscaler to provide state-of-the-art security solutions, ensuring secure digital transformation for enterprises. By leveraging these collaborations, Zscaler strengthens its market position and continues to innovate in the dynamic cybersecurity landscape.

Final Thoughts

Zscaler currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A strong portfolio, along with a commitment to innovation and a sustained focus on expanding the customer base, reflects solid top-line growth potential over the long run. The growing demand for cloud security solutions and Zscaler’s strategic market positioning provide a solid foundation for continued growth.

Despite its strengths, Zscaler faces several risks that can undermine its near-term prospects. The global economic environment remains uncertain, with potential headwinds from protracted inflationary conditions, still-high interest rates and geopolitical tensions. These factors could impact enterprise spending on software and IT services.

Moreover, Zscaler’s valuation looks stretched at the current level, as reflected by the Value Score of F. We note that Zscaler currently has a one-year forward 12-month P/E ratio of 54.68. This level compares unfavorably to the industry average of 22.44. Hence, it would be prudent for investors to wait for a better entry time.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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