Zscaler ZS is scheduled to report first-quarter fiscal 2025 results on Dec. 2, after market close.
For the first quarter, Zscaler projects total revenues to be between $604 million and $606 million. The Zacks Consensus Estimate is pegged at $605.7 million, which indicates growth of 21.9% from the year-ago quarter's level.
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Zscaler anticipates non-GAAP earnings per share (EPS) to be between 62 cents and 63 cents. The Zacks Consensus Estimate for first-quarter non-GAAP EPS has remained unchanged at 63 cents over the past 60 days, which implies a 6% decrease from the year-ago quarter’s level of 67 cents.
Image Source: Zacks Investment Research
The cloud-based security solution provider projects non-GAAP income from operations to be between $114 million and $116 million. The company’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average surprise of 32.7%.
Zscaler, Inc. Price and EPS Surprise
Zscaler, Inc. price-eps-surprise | Zscaler, Inc. Quote
Let’s see how things might have shaped up prior to the announcement.
Factors That Might Have Influenced Zscaler’s Q1 Results
Zscaler’s first-quarter results are expected to reflect the sustained robust demand for its security and networking solutions, given the continuous growth in the global security space. The solid adoption of ZS’ in-cloud security platform, Zero Trust Exchange, due to the ongoing digital transformation across enterprises and the rising trend of hybrid work, is likely to have acted as a key catalyst.
The growing adoption of Software-Defined Wide Area Network (SD-WAN) solutions might have acted as a primary driver in the fiscal first quarter. Per the latest Global Market Insights report, the market size for SD-WAN solutions and products is expected to reach $69 billion by 2032 from $7.2 billion in 2023, at a CAGR of 27%. As only a handful of vendors offer security and SD-WAN solutions, Zscaler has been benefiting from the increasing opportunities in this space. The company’s partnerships with VMware and Silver Peak have been helping it secure SD-WAN deliveries. This is expected to have aided Zscaler’s fiscal first-quarter performance.
ZS’ existing core products, mainly the Zscaler Internet Access and Zscaler Private Access, have been driving customer retention. The addition of new features to its Zero Trust Exchange, such as Cloud Access Security Broker, Cloud Browser Isolation, Cloud Protection, Zscaler Digital Experience and Cloud Security Posture Management for software-as-a-service applications, is expected to have driven its product portfolio expansion and customer acquisition.
Our model estimate for first-quarter revenues from Channel Partners and Direct Customers is pegged at $550.7 million and $54.5 million, respectively. We expect the remaining performance obligation at the end of the quarter to be approximately $3.9 billion.
Nevertheless, growing investments to improve sales and marketing (S&M) capabilities and higher research and development (R&D) costs might have weighed on the company’s fiscal first-quarter bottom line. Zscaler witnessed a year-over-year increase of 21.2% in non-GAAP S&M and 36.9% in non-GAAP R&D expenses in the last reported quarter. Total non-GAAP operating expenses climbed 25.8% year over year in the same quarter.
Zscaler Stock Price Performance & Valuation
Year to date (YTD), Zscaler’s shares have lost 5%, underperforming the Zacks Internet – Services industry’s growth of 20.5%. The stock has also underperformed its peers in the cloud-based security solution space, such as Palo Alto Networks PANW, CrowdStrike Holdings CRWD and CyberArk Software CYBR, which have risen 34.4%, 38.5% and 49.4%, respectively, YTD.
YTD Price Return Performance
Image Source: Zacks Investment Research
Now, let’s look at the value Zscaler offers investors at the current levels. ZS stock is trading at a premium with a forward 12-month P/S of 11.55X compared with the industry’s 6.01X, reflecting a stretched valuation.
Image Source: Zacks Investment Research
Investment Thesis for ZS
Zscaler is benefiting from the rising demand for cyber-security solutions due to the slew of data breaches. The increasing demand for privileged access security in digital transformation and cloud migration strategies is a key growth driver.
A strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, safeguards it from the negative impacts of ongoing macroeconomic headwinds. Portfolio expansion through acquisitions like Avalor, Canonic Security and ShiftRight is praiseworthy.
However, its aggressive investment in S&M and R&D might weigh on its near-term profitability. To survive in the highly competitive cyber-security market, each player must continuously invest in broadening its capabilities. Over the past few years, Zscaler has invested heavily to enhance its S&M capabilities, particularly by increasing the sales force.
Investment in R&D is a top priority for Zscaler. Over the past couple of years, it has almost doubled its R&D expenses to improve the design, architecture, operation and quality of its cloud platform. Though the company foresees these investments to garner benefits over the long run, these are negatively impacting margins and profit growth.
Conclusion: Hold ZS Stock for Now
While the long-term prospects for this Zacks Rank #3 (Hold) company remain bright, the near-term challenges associated with its profit growth and the stock’s high valuation warrant caution. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Therefore, we believe that it’s prudent to avoid making new investments in the stock for now. For existing shareholders, holding on to Zscaler stock is the best course of action, as the long-term growth drivers are still firmly in place.
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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.
