Zscaler‘s (NASDAQ: ZS) stock plunged following the release of its earnings report for the fourth quarter of fiscal 2024 (ended July 31). Although the company reported solid revenue growth and falling losses, a lower-than-expected outlook for fiscal 2025 seemed to send investors running for the exits.
Indeed, the stock’s swoon brings with it a much lower share price. Now, the question for investors is whether that lower price changes its investment thesis. Let’s take a closer look.
Zscaler’s earnings
Zscaler released what looked like a solid report on the surface. Revenue for fiscal Q4 was $593 million, a 30% increase from year-ago levels.
Moreover, the rise in cost of goods sold and operating expenses lagged the revenue growth rate. This increase reduced the quarterly net generally accepted accounting principles (GAAP) loss to $15 million, up from a $31 million loss in the year-ago quarter.
Nonetheless, investors typically frown on slowdowns in growth rates, and Zscaler proved no exception. The projection for the fiscal first quarter of 2025 was $605 million at the midpoint, implying a much slower revenue growth rate of 22%. With that news, Zscaler stock lost nearly 19% of its value in the following trading session.
The state of Zscaler now
Despite a significant slowdown, the report may call for some perspective. A 30% revenue growth rate implies that revenue would double in approximately 2.4 years, according to the rule of 72. Such growth rates can be difficult to maintain over a long-term time horizon, so the slowing revenue growth should not surprise investors.
Moreover, the $15 million quarterly loss implies that Zscaler is within striking distance of GAAP profitability. Also, the company generated $136 million in free cash flow during the quarter, so it is in better financial shape than the losses might imply. If not for its $528 million in stock-based compensation expenses, the company would likely be profitable already.
Furthermore, the falling stock price brings a more reasonable valuation. Although a recent price-to-sales (P/S) ratio of 12 is not “cheap,” it is near all-time lows for this stock, making it more likely further downside is limited.
Additionally, nobody can deny that Zscaler has become a major player in the cybersecurity industry. Seeing that the traditional firewall was not workable in a cloud-based computing industry, Zscaler invented zero-trust security.
Zero-trust assumes every potential entrant is an attacker, and users must show who they are through multiple characteristics to gain a level of access based on one’s rank in an organization. Today, its systems manage more than half a trillion daily transactions.
Also, even if the rate of revenue increase slows, Zscaler is likely to remain a fast-growing company for years to come. Fortune Business Insights expects a compound annual growth rate for the cybersecurity industry of 14% through 2032.
Moreover, Zscaler found that ransomware attacks rose 18% between April 2023 and April 2024. These are good signs for the company, considering the numerous competitors Zscaler faces in its industry.
Should I buy Zscaler?
Given the state of Zscaler, investors should consider buying shares of its stock at current levels.
Admittedly, September and October are traditionally challenging for the market. Also, the market tends to punish stocks when growth slows, even if it pulls back from unsustainable levels. Knowing those things, investors may want to wait until November to buy, or at least buy shares more slowly through dollar-cost averaging.
Nonetheless, Zscaler’s rapid growth is set to continue, even if it is at a somewhat slower pace. Moreover, the P/S ratio is near all-time lows, increasing the likelihood that it will find a bottom near current levels. Such factors indicate that Zscaler stock now trades at an attractive level for prospective buyers.
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Will Healy has positions in Zscaler. The Motley Fool has positions in and recommends Zscaler. The Motley Fool has a disclosure policy.
Why It’s Time to Start Buying Shares of Zscaler Stock was originally published by The Motley Fool
