Zscaler, Inc. (ZS) is Attracting Investor Attention: Here is What You Should Know

Zscaler (ZS) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.

Over the past month, shares of this cloud-based information security provider have returned -17.3%, compared to the Zacks S&P 500 composite's +3.2% change. During this period, the Zacks Internet - Services industry, which Zscaler falls in, has lost 7.8%. The key question now is: What could be the stock's future direction?

While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.

Earnings Estimate Revisions

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

For the current quarter, Zscaler is expected to post earnings of $0.58 per share, indicating a change of +20.8% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

The consensus earnings estimate of $2.49 for the current fiscal year indicates a year-over-year change of +39.1%. This estimate has changed +0.8% over the last 30 days.

For the next fiscal year, the consensus earnings estimate of $2.96 indicates a change of +18.8% from what Zscaler is expected to report a year ago. Over the past month, the estimate has remained unchanged.

Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Zscaler is rated Zacks Rank #2 (Buy).

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Projected Revenue Growth

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

For Zscaler, the consensus sales estimate for the current quarter of $535.3 million indicates a year-over-year change of +27.8%. For the current and next fiscal years, $2.12 billion and $2.64 billion estimates indicate +31% and +24.8% changes, respectively.

Last Reported Results and Surprise History

Zscaler reported revenues of $525 million in the last reported quarter, representing a year-over-year change of +35.5%. EPS of $0.76 for the same period compares with $0.37 a year ago.

Compared to the Zacks Consensus Estimate of $507.56 million, the reported revenues represent a surprise of +3.44%. The EPS surprise was +31.03%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

Comparing the current value of a company's valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps ascertain whether its stock is fairly valued, overvalued, or undervalued, whereas comparing the company relative to its peers on these parameters gives a good sense of how reasonable its stock price is.

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is pretty helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Zscaler is graded F on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Conclusion

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Zscaler. However, its Zacks Rank #2 does suggest that it may outperform the broader market in the near term.

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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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