Zscaler Stock Drops on Disappointing Guidance

Zscaler shares fell nearly 27% this year after the company issued disappointing guidance despite strong fiscal fourth-quarter results. A close examination of earnings and revenue metrics suggests that while some outlooks are underwhelming, there are positive indicators for long-term growth.

Date: 07-09-2024

AI Rating: 6

The recent performance of Zscaler (NASDAQ: ZS) raises pertinent questions about the company's stock price trajectory. After disappointing guidance issued alongside its fiscal 2024 fourth-quarter results, Zscaler's stock took a substantial hit, trading nearly 27% lower this year. While disappointing guidance typically prompts a sell-off, there are metrics suggesting that the market may have overreacted in this instance.

Zscaler reported revenue growth of 30% year over year in its fiscal fourth quarter, reaching $592.9 million and significantly surpassing its earlier outlook of $565 million to $567 million. This strong revenue performance indicates that the company is experiencing robust growth, a positive sign for investors.

Furthermore, the company's adjusted earnings per share (EPS) rose from $0.64 to $0.88, also exceeding its prior guidance of $0.69 to $0.70. These performances reflect strong underlying business fundamentals. Additionally, Zscaler generated $203.6 million in operating cash flow and $136.3 million in free cash flow, showcasing effective cash management.

Investors may find the growth in Zscaler's deferred revenue, which increased by 33% to $1.9 billion, promising for future revenue recognition. The calculated billings surged by 27% to $910.8 million year over year. For SaaS companies, these metrics can serve as vital indicators of future growth potential.

However, Zscaler's forecast for adjusted EPS in fiscal 2025, projected between $2.81 and $2.87, is below the consensus estimate of $3.33. Similarly, guidance for fiscal Q1 revenue of $604 million to $606 million falls short of the analysts' expectation of $602.8 million and adjusted EPS forecast of $0.73. The lower EPS guidance results from anticipated lower initial gross margins on new products.

Despite these setbacks, Zscaler reported a trailing 12-month dollar-based net retention rate of 115%, reflecting that existing customers are spending more than in the previous year, indicating a healthy upsell strategy. With 118 new customers added recently, contributing to a total of 567 customers with annual recurring revenues of $1 million or more, it indicates that Zscaler is successfully expanding its customer base.

In conclusion, while the stock's recent performance reflects ample market concern over its guidance, strong revenue performance, healthy financial markers, and customer retention metrics suggest that Zscaler could be a valuable long-term investment, especially if the market view is overly pessimistic.

Stocks: ZS