1 Top Stock Down 30% That Could Be a Smart Buy Right Now

This has been a year to forget for Zscaler (ZS 2.01%) investors so far: The cybersecurity specialist’s shares have lost 30% of their value year-to-date, and things have gone from bad to worse for the company following the release of its fiscal fourth quarter 2024 results on September 3.

Although it delivered better-than-expected numbers, Zscaler shares fell 17% the day after that quarterly report, as management’s guidance for the current quarter and new fiscal year fell well short of expectations. Let’s look at the reasons why Zscaler’s guidance fell short and consider whether this drop in the price of these stocks should be viewed as a buying opportunity.

Zscaler’s guidance indicates a significant slowdown

In its fiscal fourth quarter, which ended July 31, Zscaler’s revenue rose 30% year over year to $593 million, which was well above the Wall Street consensus estimate of $568 million. dollars. The cybersecurity company’s adjusted earnings rose 37% to $0.88 per share, crushing the consensus estimate of $0.69 per share.

This impressive growth was the result of an increase in the company’s customer base as well as an improvement in customer spending. For example, the number of large customers generating more than $1 million in annual recurring revenue (ARR) for Zscaler grew by 26% year-over-year to 567. Meanwhile, the number of customers with more than $100,000 in ARR increased by 19%.

On the most recent earnings conference call, Zscaler CEO Jay Chaudhry noted that demand for Zscaler’s zero-trust security solutions remains robust, while the emergence of generative artificial intelligence (AI) is “creating new avenues of growth for us “. However, it looks like Zscaler’s catalysts will take a backseat in the first half of the new fiscal year.

The company forecasts revenue of $605 million in the first quarter of fiscal 2025, which would be a 22% increase over the same quarter last year. Non-GAAP net income is expected to come in at $0.625 per share, down from the year-ago reading of $0.67 per share. In short, Zscaler’s top-line growth is slated to slow considerably in the current quarter, with management stressing that “macro remains challenging” and noting that customers are still scrutinizing large deals.

Put simply, Zscaler management says the company is currently facing a challenging spending environment. This could be attributed to a slowdown in business spending due to higher interest rates and a warm economy. At the same time, the lower margin profile of Zscaler’s emerging products and the company’s investments in cloud infrastructure and AI explain why its revenue is slated to decline in the current quarter. Prior to the latest report, consensus estimates were forecasting $0.73 per share in fiscal Q1 earnings.

Full-year guidance isn’t very promising either, as Zscaler expects its top line to reach $2.61 billion. That would be a 20 percent increase from fiscal 2024 levels, when the company’s top line grew 34 percent. Also, the full-year earnings estimate of $2.84 per share is well below the consensus estimate of $3.33 per share and would be down from the $3.19 per share it earned in fiscal year 2024.

All in all, it’s no surprise to see why investors hit the panic button following Zscaler’s latest report. However, there are some details that suggest this company could be making a comeback.

Looking beyond prudent company guidance

There’s no denying that Zscaler’s selloff after its latest quarterly report looks justified. But at the same time, investors shouldn’t miss the fact that the company is building a robust long-term revenue pipeline that could help it regain its mojo.

More specifically, Zscaler’s remaining performance obligation (RPO) was $4.4 billion last quarter, a 26% improvement over the same quarter last year. Additionally, its 115% net retention rate based on dollars indicates that its existing customers continue to spend more money each year on its offerings. (This metric compares spending by a company’s established customers in one quarter to spending by the same customers in the same quarter last year, so a reading above 100% means adoption of Zscaler’s cybersecurity services is improving.)

Furthermore, Zscaler claims to have a total addressable market (TAM) of $96 billion, which leaves it with plenty of room for growth. So the issues Zscaler is facing right now could pave the way for stronger growth in the future. That’s why it could prove to be a smart buy for opportunistic investors looking to add a growth potential stock to their portfolios.

After the recent pullback, Zscaler stock is trading at 10 times sales, significantly lower than its five-year average sales multiple of 22. Of course, that lower sales multiple can be attributed to its forecast for a slowdown in its near-term growth, but if its fortunes rebound when macro conditions ease, that valuation could look like a bargain in hindsight, especially given its solid revenue volume and sizable affordable market.