2024 has been a bad year for Zscaler (NASDAQ: ZS) investors, as the cybersecurity specialist’s share prices fell by 17%. However, its fiscal 2024 third quarter results (for the quarter ending April 30) were released on May 30 and suggest the rest of 2024 could be better.
Zscaler’s stock price rose 8.5% the day after the company released its latest quarterly report on news that the company’s sales and profits crushed Wall Street expectations. More importantly, the stock has kept its foot on the gas since then (up 17% year to date).
Let’s take a look at the reasons why this cybersecurity stock could maintain its new-found momentum.
Zscaler’s beat-and-raise quarter points to better times ahead for investors
Zscaler’s third-quarter revenue rose 32% year over year to $553.2 million, well above the consensus estimate of $535.9 million. The company’s earnings grew at a stronger pace of 83% year-over-year to $0.88 per share, miles ahead of analyst estimates of $0.65. The positive developments didn’t stop there, as Zscaler raised its full-year revenue guidance to $2.14 billion, up from the previous figure of $2.12 billion.
It’s worth noting that Zscaler originally expected revenue growth of 27% in fiscal 2024, but now expects to end the year with a revenue increase of 32%. The company also expects a 4.9 percentage point increase in operating profit margin this year. As a result, Zscaler now forecasts fiscal 2024 earnings to be $3 per share, compared to its previous guidance of $2.20 to $2.25 per share.
A key reason Zscaler was able to deliver a beat-and-raise quarter is the growing adoption of the company’s cloud security platform. This is reflected in the company’s dollar-based net retention rate of 116%, a metric that compares its customers’ spend to those same customers’ spend in the same period last year. So a score above 100% means that Zscaler customers have expanded their use of the offering or adopted more of their products.
The number of Zscaler customers with more than $1 million in annualized recurring revenue (ARR) increased 31% year-over-year, while the number of Zscaler customers with more than $100,000 ARR increased 20% year-over-year . More importantly, Zscaler expects to capture a larger share of customers’ wallets by integrating artificial intelligence (AI) tools into its cloud security platform.
Management pointed out during the company’s latest earnings conference call that it is “developing multiple AI-powered applications.” The good part is that Zscaler has already started deploying some of its AI solutions, such as a co-pilot that will help security analysts become more efficient, as well as a generative AI security offering that will allow customers to monitor generative AI apps.
Thanks to these moves, Zscaler believes its current total addressable market of $72 billion could grow by “several billion dollars.” We’ve already seen that Zscaler expects full-year revenue of just over $2 billion, meaning the company could be at the beginning of a remarkable growth curve.
Even more reasons to buy shares
It’s worth noting that 79% of the 43 analysts covering Zscaler stock rate it a Buy. The average price target for the next twelve months of $223 points to an upside of 18% from current levels. Therefore, it would be a good idea to buy Zscaler stock now, as it trades at 13.7 times sales, which is significantly lower than its five-year average price-to-sales ratio of 23.
Additionally, the forward price-to-earnings multiple of 56 may seem expensive at first glance, but that’s a significant discount to the five-year average earnings multiple of 156. Investors should also note that Zscaler’s earnings guidance for fiscal 2024 suggests that its earnings numbers on track to grow by 67% compared to the previous financial year. So Zscaler should be able to justify its rich valuation by delivering robust earnings growth. Therefore, investors looking to buy a growth stock would do well to buy it before it continues to rise.
Should You Invest $1,000 in Zscaler Now?
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Zscaler. The Motley Fool has a disclosure policy.
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