Zscaler(NASDAQ:ZS) investors may want to forget about 2024. Shares of the cybersecurity specialist have fallen more than 10% year to date on concerns about its slowing growth, and the company appears poised to take on 2025 behind.
The stock fell nearly 5% on Tuesday after Zscaler reported its first-quarter fiscal 2025 results after markets closed on Monday. However, a close look at the company's results and guidance suggests that investors may have overreacted.
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Let's take a look at why Zscaler stock fell following its earnings and check if this drop could be a buying opportunity for investors.
For its fiscal first quarter, which ended Oct. 31, Zscaler reported revenue of $628 million, an increase of 26% from the same period last year. The non-GAAP net income jumped 40% to $0.77 per share. Analysts' consensus estimates were for earnings of $0.63 per share on revenue of $606 million.
The company significantly exceeded these estimates thanks to strong growth in customer spending and an increase in the number of large customers. For example, the number of customers providing annual recurring revenue (ARR) of more than $100,000 increased 17% year-over-year to 3,165. Meanwhile, the number of customers providing more than million dollars in ARR increased by 25%, to 585.
Zscaler's bookings – the value of contracts signed by customers during the quarter – increased 30% year over year, outpacing its revenue growth.
Additionally, Zscaler's focus on adding artificial intelligence (AI)-driven cybersecurity services has encouraged the company's established customers to spend more on its offerings. This is evident from the company's 114% net retention rate, calculated in dollars. This metric compares the money customers spent on a company's offerings in a given quarter to the amount those same customers spent in the prior year period. A reading of over 100% in this metric means its customers are increasing their spending on its services over time, which bodes well for Zscaler as it underlines the strength of its cybersecurity platform.
Another thing to note here is that the ARR of Zscaler's emerging products has grown at a rate more than twice that of its core products. This can be attributed to the company's focus on securing public and private AI applications, as well as the launch of AI-based products. Management stated on the earnings conference call that products such as its AI-powered virtual assistant, ZDX Copilot, are contributing to an increase in transaction sizes due to their growing customer adoption.
Zscaler estimates its total addressable market opportunity at $96 billion, suggesting it could ideally continue to see improved spending on its products thanks to the advent of new technologies such as AI . All of this explains why the company increased its guidance for the full year. The company now expects revenue to grow 21.5% in fiscal 2025 to $2.63 billion, up from its prior forecast of 20% growth. 5%.
Management also raised its earnings per share forecast to a range of $2.94 to $2.99, up from $2.81 to $2.87 previously. The company's revenue forecast of $634 million for the current quarter is also slightly above Wall Street expectations.
Despite all these positive developments, many investors have decided to hit the sell button. This may be due to the company's valuation.
The fact that Zscaler's outlook for the current quarter was barely above analysts' expectations of $633 million may have led to a post-earnings sell-off. After all, the company's forecast calls for revenue growth of 21.5%, which would be significantly slower than the 35% growth reported in the same quarter last year.
Zscaler trades at 14 times sales, which represents a premium to the U.S. tech sector's average sales multiple of 8 times. Against this backdrop, the company's slowing growth appears to have raised a wake-up call for investors. It also trades at a lofty 72 times forward earnings. Given that Zscaler's earnings are expected to fall this year from $3.19 per share last fiscal year, we can conclude that it is currently highly valued.
As such, buying Zscaler after its latest release may not seem like a good idea. However, if the stock continues to fall until it reaches a lower valuation, it might be worth considering. After all, the company's remaining performance obligations increased 26% year over year to $4.4 billion last quarter. This metric refers to the total value of a company's contracts that will be executed in the future, such that its revenue pipeline improves.
There's no denying that Zscaler is indeed growing at a good rate, but its valuation is the sticking point. That's why investors would do well to add the stock to their watchlists, to revisit it if it becomes available at a more attractive level.
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