Accelerating Growth Make Zscaler (NASDAQ:ZS) A Buy

Zscaler Is A Cloud-Winner That Keeps On Winning

The number one most enduring trend sparked by the COVID-19 pandemic is an accelerated shift to digitization. There is evidence of it everywhere you look. Earnings from retailers are driven by eCommerce, businesses are navigating shut-downs and eCommerce with cloud-based remote-work solutions, and Americans are getting more and more of their entertainment across the ether.

And all of it comes with risk. It’s risky to access the Internet, there are bad people with sophisticated programs just waiting for a target, which is why security companies like Zscaler (NASDAQ:ZS) are doing such good business. The company operates a completely cloud-based platform that can be used to manage cloud, network, and Internet connections across a wide range of applications that are all in demand.

Zscaler Beats Consensus And Raises Guidance

Zscaler is one of those pandemic-winners that keeps on winning. Not only did the company’s revenue grow it grew more than consensus and accelerated from the previous quarter and year. The $125.89 million reported is up 46.2% from the previous year, better than the $39 million reported in the prior quarter, and beat consensus by $7 million or about 600 basis points.

Adjusted earnings came in at $0.05 or $0.02 above consensus, with strength expected in the following quarter as well. Total billings, a leading indicator of revenue, are up 55% YOY and lend reason to why the company decided to raise guidance. Guidance for both the following quarter and full-year F2021 was increased to a range above consensus sparking bullish chatter out of the analysts.

Zscaler Is A Pure-Play On Cloud Computing

Zscaler has been described by more than one analyst as the best pure-play in cloud security available today. If the analysts can be believed, this is just the beginning of a long road of revenue growth because the use of the cloud is only going to expand.

"In our opinion, ZS is the best pure-play in the cloud security arena, which we believe is still in the very early innings of taking off with overall hybrid cloud workloads poised to meaningfully accelerate over the coming years and in this climate could see some strategic deals moved forward as the shift to cloud outside the firewall is catalyzing a handful of key sales cycles,” said Wedbush analyst Danial Ives following the FQ4 earnings report.

Ives raised his price target to $160, about 12% upside to the current price, and he is not the only one getting bullish. Bank Of America raised its price target to $155 and thinks the FY guidance is too conservative.

The Technical Outlook: Zscaler Is Setting Up For Another Rally

Shares of Zscaler were not immune to the recent market correction but that is good news for investors. The pullback has opened up an opportunity to buy in at a cheaper price before the next leg of the rally gets underway. So far, support looks good at the short-term 30-day EMA. Price action is hitting some resistance above $140 but it probably won’t last long.

The indicators are still bearish but creating oversold conditions. When combined with price action and support at the moving average, the indicators are set up to fire a strong trend-following entry signal when prices move higher.

In the very near-term traders might expect to see this stock move more sideways than not. A retest of the support level near $130 is not out of the question and actually welcome provided support holds. Longer-term, this stock is poised to move significantly higher as cloud-use expands.