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Zscaler, Inc.'s (NASDAQ:ZS) Latest Pullback Provides a Buying Opportunity, But it Doesn't Come Without Risks
As the market experienced the worst week since June, Zscaler, Inc. (NASDAQ: ZS) was among the stocks leading the decline.
Yet, as cyber security keeps gaining on importance, it still boasts an excellent return in 2021, as well as an overall return since the public market debut in 2018. Here are the latest developments and concerns regarding this growth stock.
View our latest analysis for Zscaler
Latest Earnings Update
- Q4 Non-GAAP EPS: US$0.14 (beat by US$0.05)
- GAAP EPS: -US$0.59 (miss by US$0.14)
- Revenue: US$197.1m (beat by $9.66m)
- Guidance for the FY 2022: Total Revenue of US$940-950m vs. US$909.55m consensus
Cybersecurity is a hot word in 2021, after several serious incidents earlier this year. Thus, it doesn't surprise to see quality results, with revenue growth of 57%.
It is interesting to note that Zscaler almost doubled the number of accounts with an average recurring revenue larger than US$1m. It now has 202, compared to 108 in the last year.
These results prompted several analysts to upgrade the view of the stock, with the most optimistic being Needham's Alex Henderson, who holds it as a Strong Buy with a price target of US$345, and Canaccord's T.Michael Walkley has a price target of US$340.
On the more conservative side of the spectrum is Morgan Stanley's Keith Weiss with a price target of US$275 and Piper Sandler's Rob Owens with a price target of US$285.
These targets range between 5% and 25% upside, with our fair value model being a bit optimistic with a fair value of $333. You can check more on our valuation in this article.
What is Zscaler worth?
The company's stock saw a significant share price rise of over 20% in the past couple of months on the NASDAQGS.As a large-cap stock with high coverage by analysts, you could assume any recent changes in the company's outlook are already priced into the stock.
However, what if the stock is still a bargain?
With our model valuing the stock at $333.12. this gives it a decent upside. Furthermore, Zscaler's low beta implies that the stock is less volatile than the wider market.
What does the future of Zscaler look like?
Future outlook is an important aspect when you're buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let's also look at the company's future expectations.
However, with negative profit growth of -8.3% expected over the next couple of years, near-term growth certainly doesn't appear to be a driver for a buy decision for Zscaler. This certainty tips the risk-return scale towards higher risk.
What this means for you:
Are you a shareholder? Currently, ZS appears to be trading below its fair value, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio.
Is your current exposure to the stock beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you decide on the stock, please take a look at whether its fundamentals have changed.
Are you a potential investor? If you've been keeping tabs on ZS for a while, you might wait for the current market pullback before getting in. Alternatively, you might decide to start investing in blocks, essentially averaging down through the pullback.
However, there are also other important factors we haven't considered today, which can help crystalize your views on ZS should the price fluctuate below its true value.
So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Be aware that Zscaler is showing 5 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
If you are no longer interested in Zscaler, you can use our free platform to see our list of over 50 other stocks with high growth potential.
What are the risks and opportunities for Zscaler?
Rewards
Trading at 35.3% below our estimate of its fair value
Revenue is forecast to grow 21.81% per year
Risks
Shareholders have been diluted in the past year
Currently unprofitable and not forecast to become profitable over the next 3 years
Further research on
Zscaler
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Stjepan Kalinic
Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.
About NasdaqGS:ZS
Excellent balance sheet with moderate growth potential.
