Should You Buy Zscaler Shares Before September 3rd?

It’s been a wild ride for Zscaler (ZS -0.30%) investors so far in 2024. While shares of the zero-trust cloud cybersecurity innovator have gained more than 40% over the past year, they are also down about 25% from their 52-year high weeks.

There is a lot of excitement about the growth potential from the company’s initiatives that integrate artificial intelligence (AI) into its platform. On the other hand, the stock has a high valuation in a highly competitive industry.

The company’s fourth-quarter earnings report, scheduled for release on September 3, could reaffirm a positive long-term outlook. Should investors buy Zscaler stock now or take a wait-and-see approach?

Cyber ​​security based on artificial intelligence

Zscaler’s Zero Trust Exchange has gained market adoption as an alternative to legacy cybersecurity solutions. Zero-trust architecture assumes that no data or communication is inherently secure, unlike traditional firewalls that trust everything within a network’s perimeter.

Several high-profile security breaches exploiting firewall vulnerabilities have led organizations to deploy Zscaler’s more robust cloud-based platform. The company believes it operates in a $72 billion addressable market, with the recent launch of several new applications, including Risk360 and Unified Vulnerability Management, expanding its opportunities.

The company uses AI to improve the platform’s capabilities. The GenAI and AI Copilot app use machine learning and automation to proactively monitor and respond to security threats. Perhaps the biggest development this year was Zscaler’s acquisition of Avalor, which strengthened Zscaler’s leadership in artificial intelligence while giving it entry into security-centric enterprise data management. Overall, there’s a lot to like about Zscaler in what could still be the early stages of a significant expansion.

Image source: Zscaler.

What to expect from Zscaler’s next quarterly report

The market is hoping to see a continuation of the company’s recent operational and financial momentum in its upcoming fourth quarter earnings report.

Management guided for revenue growth of 24% to 25%, with earnings per share (EPS) estimated at $0.69 to $0.70. For the full year, the EPS target of around $3.00 represents a 68% increase from the result of $1.79 in fiscal 2023. This increase in profitability has been a major theme for Zscaler, which has generated much higher operating margins large as his business grows. .

Beyond headline numbers, the market will focus on key performance indicators. The standout last quarter was its 116% dollar-to-net retention ratio, which suggests the company’s existing customers are increasing their spending on the platform by adding features or accepting higher prices. Zscaler now has 523 accounts generating over $1 million in annual recurring revenue (ARR), up 31% year over year.

This dynamic of integrating larger organizations and building on these relationships provides good evidence that Zscaler’s innovations are resonating in the market. Investors will be hoping that the Q4 update confirms that Zscaler is making progress toward its goal of $5 billion in ARR, more than double the size of the business today. That multi-year roadmap is a big part of the stock’s bull case.

Is Zscaler a buy now?

I am bullish on Zscaler based on its success in becoming sustainably profitable and its emerging leadership in AI. At the same time, these earnings reports are high-risk events for investors, especially since expectations for the company are already high.

Zscaler is trading at 66 times management’s 2024 estimate. I think the earnings premium is justified given the company’s growth prospects, but it also warrants caution as it leaves a small margin for error in a scenario in which the results disappoint.

I expect Zscaler’s results to match estimates this quarter, though that may not be enough to trigger an immediate rally in the stock. The prudent move would be for investors to wait until after the report to open new positions in the stock, although current shareholders should stay the course. Management’s guidance will set the tone for the company’s fiscal 2025 stock.