Zscaler: Analysts Raise the Bar for the AI Cloud Security Company

Zscaler Inc. NASDAQ: ZS has differentiated itself from competitors and emerged as the leader in AI-powered cloud security. Unlike competitor SentinelOne Inc. NASDAQ: S, the company's FQ3 results increased the market, extending the gains inspired by the NVIDIA Co. NASDAQ: NVDA AI-powered blowout.

The takeaway for investors is that this company's business is still growing at a near 50% year-over-year (YoY) pace, driven by strength in all sectors. That's sectors of the economy, not segments of business that are also performing better than consensus. Companies of all varieties are turning to Zscaler for their security needs, which will sustain growth over the next few years. 

The third-quarter revenue is less than $50 million compared to Palo Alto Network's $1.78 billion, suggesting Zscaler could double or triple in size. 

Zscaler Scales with Clients, Outpaces Consensus

Among Zscaler's many features are its ability to scale and provide scalable security solutions to its clients. Those features led to $418.8 million in revenue, a gain of 46% compared to last year, 170 bps above the MarketBeat.com consensus figure and better than last month's pre-announcement, although growth continues to slow. The good news is that calculated billings of 40% and deferred revenue of 44% suggests a high level of growth will continue this year. 

The margin news is also good. Disciplined spending and revenue leverage led to a sharp contraction in operating losses. The GAAP loss shrank to 13% of revenue from last year's 30%, and the cash flow adjusted figures are even better. The company's adjusted net income more than tripled, leaving FCF at $73.9 million, up 70% and 18% of revenue, increasing 300 basis points YoY. 

The guidance is equally good and includes outperformance in the fourth quarter. The company expects revenue and earnings in a range above the analysts' consensus figures, and the guidance may be cautious. The company is cementing its position and may continue to build momentum through the end of the year despite macro headwinds.  

The Analysts Raise the Bar for Zscaler 

The analysts like what they see in Zscaler's results. The 35 analysts with current ratings have issued six reports that Marketbeat has picked up so far — all include a price target increase. The new range has the Zscaler stock price trading well above the $165 consensus figure, which assumes 15% of the upside even with the post-release price surge. 

The consensus figure is still trending lower, but the new activity shows a floor in sentiment and one that should help propel the stock to new highs over the summer. 

The institutional activity may be a headwind. The institutions have shedded shares for the last few quarters, selling the total position down to about 44%. It will have difficulty gaining traction if they continue to sell into the rally. The caveat is that institutional sentiment may improve and support the market. The market could rise above critical resistance and into the $175 range in this scenario. 

The Technical Outlook: Zscaler Bottomed Out

Zscaler's shares have bottomed and rebounded, but a sustained rally may not have started. The market faces significant resistance at $158.50, which could cap gains over the summer. If the market can not reach that level, range-bound conditions are likely. If the market can get above that level, the next hurdle is near $190.