Bear of the Day: Zscaler (ZS)

·3 min read

Zscaler (ZS) is a Zacks Rank #5 (Strong Sell) that is one of the world’s leading providers of cloud-based security solutions.

The stock has been very hot this year, up over 50% and hitting all-time highs last week. However, earnings estimates are ticking lower ahead of their report in December. Investors might want to lock in some gains, to avoid a nasty pullback before the year is out.

About the Company

Zscaler is headquartered in San Jose, CA and employs over 3,000 people. The company was founded in 2007 and serves customers in airlines and transportation, conglomerates, consumer goods and retail, financial services, healthcare, manufacturing, media and communications, public sector and education, technology, and telecommunications services industries.

ZS is valued at $40 billion and has a Forward PE of 530. The company holds a Zacks Style Score of “B” in Growth but “F” in Value. That high PE won’t be bringing any value investors and growth is key for this stock.

Q4 Earnings

The company reported a nice quarter back in September, seeing a 55% beat on the bottom line. Revenues came in above expectations and the company guided FY22 revenues above expectations. Nothing wrong with the quarter except a Q1 range guide below expectations.

The stock fell slightly. but has rallied back to highs with the recent market rally. However, estimates for the company are falling, so perhaps investors are getting ahead of themselves.

Estimates

Over the last 60 days, estimates have fallen across all-time frames. For the current quarter, we see a 14% drop, from $0.14 to $0.12. For next current year, estimates are about flat, but still falling 2%.

Since EPS, we have seen a bunch of analysts raise price targets, despite the drop in estimates. So obviously the street is bullish about the upcoming quarter.

But investors should take caution as the valuation will likely cause the stock to be sold, even if the company prints a great quarter.

Zscaler, Inc. Price and Consensus

Zscaler, Inc. Price and Consensus
Zscaler, Inc. Price and Consensus

Zscaler, Inc. price-consensus-chart | Zscaler, Inc. Quote

Technical Take

The stock looks great on the technical front, with all-time highs coming last week. There is a good chance that the stock breaks $300 before EPS, but any move above that level should be seen as profit taking.

If the stock were to break $265, we could see some downside. That level is the 50-day MA, which has held up since May.

In Summary

Long-term Zscaler looks like it will continue to be a leader in the security cloud space. However, looking over the next few quarters, we could see valuation issues pop up that will lead to selling in the stock.

A pullback is warranted and investors would likely be rewarded by targeting the 200-day MA under $220.


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