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Zscaler Stock Decline: Revenue Slowdown Raises Concerns

Zscaler's stock has seen a significant decline, dropping 24% this year despite broader market gains. A disappointing revenue outlook has led to increased scrutiny, with the company remaining unprofitable operationally. Investors are keen to see if the current price downturn has reached its bottom.

Date: 
AI Rating:   5

Zscaler (NASDAQ: ZS) has experienced a decline of 24% in its stock price this year, contrasting sharply with the S&P 500's 16% gain. Despite a brief recovery in August, the stock plummeted 20% following the announcement of preliminary results for 2024. This pattern highlights the volatility Zscaler has faced, especially given its performance against competitors like Palo Alto Networks (NASDAQ: PANW), Check Point Software (NASDAQ: CHKP), and Fortinet (NASDAQ: FTNT), which have seen increases of 20-30% this year.

One significant factor in this downturn is Zscaler's revenue growth, which has been impressive, with over 40% growth annually from 2016 to 2023. However, this revenue trajectory has not translated to profits, as the company continues to post operating losses. Despite the dip in stock price appearing to reach more sustainable levels, estimates suggest that the company's valuation may still be overstated, suggesting further potential declines.

The report indicates that Zscaler's preliminary sales results for fiscal year 2024 show a continuation of strong growth at approximately 30%. However, given that the company is still not profitable at the operating level (GAAP), this raises concerns among investors. Encouragingly, the report mentions that losses have narrowed significantly, which may provide some reassurance to stakeholders.

The report also notes Zscaler’s projected revenue growth of 22% for Q1 FY2025. While this reflects a slowdown compared to earlier years, it is still considered healthy. A key determinant for stock performance will be how actual growth aligns with expectations; any upside could positively impact Zscaler's stock value moving forward.

In terms of stock performance relative to the S&P 500, Zscaler has predominantly underperformed, with returns of -27% in 2024 compared to the S&P's gain of 16%. The long-term returns further emphasize this trend, with Zscaler's cumulative total return of -66% against the S&P's impressive 147% from 2017-2024.

This ongoing uncertainty in the market, exacerbated by potential rate cuts and geopolitical tensions, poses a risk for Zscaler's future stock performance. Investors will need to closely monitor revenue trends and broader market conditions to gauge if the stock can achieve sustainable growth.

Stocks:  ZS PANW CHKP FTNT