Why Zscaler Stock Dropped This Week

Cyber ​​Security Company Investors Zscaler (ZS 3.26%) I probably haven’t felt very safe these past few days. According to data compiled by S&P Global Market Intelligence, shares of Zscaler are down nearly 19% year to date as of late Thursday night. An uninspiring quarterly earnings report, accompanied by analysts’ price target cuts and even a downgrade, was largely to blame.

Success behind, disappointment looming

Zscaler released its fiscal fourth quarter 2024 results after the market closed on Tuesday, and the subsequent investor reaction set the tone for the rest of the week.

It wasn’t that the company did poorly in the quarter ended July 31. Rather, the opposite happened, as its revenue grew a strong 30% year-over-year to nearly $593 million, while billings rose 27% and deferred revenue rose 32%. Non-GAAP (adjusted) net income topped them all, jumping 39% to nearly $141 million. Speaking of beats, both top and bottom results were comfortably higher than analysts’ consensus estimates.

Savvy investors trade on future potential rather than bottom line performance, and that was the problem for Zscaler. The company’s adjusted profitability guidance for both the current quarter (first) and the full fiscal year 2025 was disappointing. We anticipate earnings per share of $0.62 for the first period and $2.84 for the latter; both are considerably below the experts’ average projection.

More cuts and a relegation

Investors didn’t like that guidance, and at least a few analysts were cool with it. Several cut their price targets on Zscaler stock following that earnings report, with one taking the additional step of downgrading their recommendation.

Tal Liani of Bank of America Securities now thinks the company is only worthy of a neutral, where it was previously rated a buy. In addition to this change, Liani lowered his stock price target to $195 per share from $265. The forecaster was particularly concerned about management’s weaker-than-expected billings guidance, which he wrote, “raises concerns about underlying growth, the impact of competition and disappointing upfront sales opportunities.”