In the ever-evolving landscape of technology stocks, Zscaler (NASDAQ: ZS) stands out after experiencing a notable downturn following its latest earnings report for fiscal Q4 2024, which concluded on July 31. Speculation regarding future growth prompted a significant sell-off, yet a deeper exploration reveals a more resilient narrative worth considering for potential investors.
Despite a decline in stock value, Zscaler’s recent performance displays strong revenue momentum. The reported $593 million in revenue represents a remarkable 30% year-over-year growth. Additionally, the company’s ability to manage costs—where costs of goods sold and operating expenses increased at a slower pace than revenue—resulted in a reduced net GAAP loss of $15 million, an improvement from a $31 million loss in the same quarter last year.
However, investor sentiment turned bearish after Zscaler provided a forecast for Q1 2025, predicting revenues around $605 million. This estimate reflects a deceleration—only a 22% growth outlook—which understandably raised eyebrows. Consequently, shares tumbled nearly 19% in the aftermath, yet this could present an enticing entry point for forward-thinking investors.
It’s essential to contextualize this slowdown in growth. A projected revenue growth of 30% suggests that Zscaler has the potential to double its income in a little over two years, as demonstrated by the rule of 72. Sustaining such high growth rates is challenging, especially as the company continues scaling its operations. The present loss of $15 million quarter-on-quarter is a narrow margin, indicating the company is on the brink of achieving GAAP profitability. Coupled with a substantial $136 million in free cash flow during the quarter, Zscaler indicates a healthy financial state, notwithstanding the underlying stock-based compensation expenses totaling $528 million.
Additionally, the recent decrease in Zscaler’s stock price has rendered it comparatively more appealing for potential investors, with its price-to-sales (P/S) ratio dropping to around 12—near historic lows. This valuation adjustment can suggest that the stock has limited further downside potential, making it a more attractive prospect in the ever-competitive cybersecurity sector.
Zscaler is a key player in the cybersecurity arena, having pioneered the zero-trust security model, which is increasingly vital in today’s cloud-based computing environment. This model effectively addresses the inadequacies of traditional firewalls, asserting that every user, regardless of their location within the network, must authenticate their identity before gaining access. Currently managing upwards of half a trillion transactions daily, the firm is well-poised to capture growth opportunities in a market that is expanding rapidly amid increased cybersecurity concerns.
Recent statistics indicate a surge in ransomware attacks, which rose by 18% between April 2023 and April 2024. These trends may bolster Zscaler’s relevance in a marketplace flooded with numerous competitors as businesses seek robust and innovative cybersecurity solutions.
So, given the current landscape, should you consider investing in Zscaler stock at this moment? While caution is warranted—especially given that September and October are historically difficult months for the stock market—the value proposition presented by Zscaler is compelling. Investors may find it prudent to implement dollar-cost averaging strategies or wait for a clearer market signal before making sizable purchases.
The dynamics of rapid growth may have shifted to a slower pace, but Zscaler’s trajectory remains promising. Its healthy financial metrics combined with an attractive valuation suggest that savvy investors could find a rewarding opportunity in Zscaler’s shares as the cybersecurity sector continues to thrive against the backdrop of escalating digital threats.
Before diving headfirst into a Zscaler investment, keep in mind that the Motley Fool’s Stock Advisor team has recently spotlighted their top ten stock picks—Zscaler did not make this coveted list, which may be relevant for potential investors seeking a diversified portfolio with solid prospects for returns.
In conclusion, Zscaler’s current situation offers a distinctive opportunity. As the cybersecurity landscape continues to evolve, with increasing threats prompting enterprises to seek reliable solutions, Zscaler may just emerge as a cornerstone investment for those looking to capitalize on future growth.