Zscaler Faces Challenges Despite Fiscal Q4 Gains

Zscaler investors encounter a tough year as shares drop 30%. Despite exceeding fiscal Q4 expectations, the stock fell 17% due to lower guidance. Concerns about macroeconomic impacts on customer spending may influence future stock performance, prompting a closer evaluation.

Date: 15-09-2024

AI Rating: 5

According to the report, Zscaler's fiscal Q4 results indicated a revenue increase of 30% year over year, totaling $593 million, outperforming Wall Street estimates of $568 million. The adjusted earnings per share (EPS) also showed strong growth, rising 37% to $0.88 per share, significantly higher than the consensus estimate of $0.69 per share. This suggests that Zscaler is maintaining a robust revenue stream and effectively monetizing its customer base.

However, the stock's decline of 17% following this strong fourth quarter is primarily linked to management's guidance for the upcoming quarter and fiscal year. Zscaler forecasts $605 million in revenue for the first quarter of fiscal 2025, a 22% increase from the previous year, but this also indicates a significant slowdown compared to the previous year's growth rate. More glaringly, the expected non-GAAP net income per share is anticipated to decrease to $0.625, down from $0.67, highlighting a challenging environment for profitability.

The report highlights that Zscaler's management is concerned about the macroeconomic conditions impacting large enterprise spending. With the current higher interest rates and a sluggish economic environment, organizations are more cautious with expenditures, which has affected Zscaler's future revenue expectations.

Furthermore, the company's full-year guidance predicts revenue of $2.61 billion, which represents a 20% increase but is less than the 34% growth seen in the prior year. The full-year earnings projection at $2.84 per share is also lower than analyst expectations of $3.33 per share, indicating potential profit margin pressures and leading investors to react negatively.

On a more positive note, Zscaler retains a solid customer foundation. Its remaining performance obligation (RPO) is $4.4 billion, a 26% increase from the previous year, and its dollar-based net retention rate stands at 115%. Furthermore, Zscaler's total addressable market (TAM) of $96 billion hints at significant potential for future growth.

Despite current challenges, Zscaler's impressive revenue growth from existing clients, coupled with its substantial market opportunities, could make it an interesting prospect for long-term investors willing to navigate through short-term market fluctuations. However, the growth projections and earnings expectations suggest caution in the near term.

Stocks: ZS