Barclays: Zscaler's Q3 Numbers 'Speak For Themselves,' But Bullish Stance Can't Be Justified

Zscaler Inc ZS, a cloud security provider, reported Wednesday afternoon with third-quarter numbers that "speak for themselves," but investors shouldn't be aggressive on the stock, according to Barclays.

The Analyst

Barclays' Saket Kalia maintains an Equal Weight rating on Zscaler's stock with an unchanged $36 price target.

The Thesis

Zscaler showed accelerating billings growth in its Q3 report that likely carried over into the fourth quarter, Kalia said in a research report.

Calculated billings in the quarter came in at $54.7 million, which not only marks an acceleration to 73 percent from one year ago, but beat the analyst's estimate of $43.5 million. The billings beat is attributed to more contracts that paid multiple years upfront rather than annually.

Even excluding these multiyear upfront payments, billings still would have accelerated to 60-percent growth, which reaffirms the company's momentum and market share gains in secure web gateway and cloud sandboxing, Kalia said. 

Zscaler's stock already reflects the company's ability to satisfy the growing "mega trend" in cloud security, the analyst said.

Even when assuming a 35-percent growth rate in fiscal 2019 and 2020, a $36 price target is justified based on a 13x multiple and implies minimal upside from Thursday morning's trading action.

Nevertheless, Zscaler faces several upcoming potential catalysts for the stock, including the move to Office 365, SD-WAN requiring networking transformation, and the company's annual user conference June 26-27 that could feature product-related news.

Price Action

Shares of Zscaler were trading higher by more than 23 percent Thursday morning.

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