Should Investors Worry About Zscaler's Deceleration? 12 Analysts Provide Takeaways

Shares of Zscaler Inc ZS tanked in premarket trading on Friday, after the company reported higher-than-expected sales and earnings for the fiscal second quarter.

The results came amid an exciting earnings season. Here are some key analyst takeaways from the release.

• Goldman Sachs analyst Gabriela Borges maintained a Neural rating, while raising the price target from $189 to $215.
• Wedbush analyst Daniel Ives maintained an Outperform rating, while raising the price target from $250 to $260.
• RBC Capital Markets analyst Matthew Hedberg reiterated an Outperform rating, while lifting the price target from $260 to $265.
• Cantor Fitzgerald analyst Yi Fu Lee reaffirmed a Neutral rating, while reducing the price target from $250 to $230.
• BMO Capital Markets analyst Keith Bachman maintained an Outperform rating, while cutting the price target from $268 to $255.
• Piper Sandler analyst Rob Owens reiterated an Overweight rating and price target of $255.
• Stifel analyst Adam Borg reaffirmed a Buy rating and price target of $270.
• Scotiabank analyst Patrick Colville maintained a Sector Outperform rating and price target of $250.
• JMP Securities analyst Trevor Walsh reiterated a Market Outperform rating and price target of $270.
• Truist Securities analyst Joel Fishbein reaffirmed a Buy rating and price target of $260.
• KeyBanc Capital Markets analyst Eric Heath reiterated a Sector Weight rating on the stock.
• Needham analyst Alex Henderson maintained a Strong Buy rating and price target of $290.

Check out other analyst stock ratings.

Goldman Sachs: Zscaler’s quarterly billings and margins were higher than the Street expectations, Borges said in a note. Management raised their billings guidance for fiscal 2024 by 1% and operating income by 10%, she added.

“We believe the stock’s performance in the premarket reflects concerns about the pace of deceleration in billings growth (from 37% in FY23 to 26% in FY24E) in an evolving competitive landscape,” the analyst wrote.

Wedbush: Zscaler delivered impressive top- and bottom-line beats “yet again as the company drives forward with momentum in the zero trust space while maintaining impressive margin discipline,” Ives wrote in a note.

Although the company raised its full-year guidance, it “continues to be a conservative,” especially in view of “the underlying strength that ZS is seeing in the field despite the ongoing scrutiny over large deals,” the analyst stated. “Overall, we continue to believe ZS is a top name in this space to own as this cloud cyber security shift accelerates over the next decade.”

RBC Capital Markets: “Strong momentum continued this quarter with broad-based outperformance and particularly strong profitability,” Hedberg said.

“Despite ongoing macro challenges and an evolving go-to-market, management raised guidance for all metrics while still building in conservatism on go-to-market changes noting a solid demand environment and healthy pipeline,” he added.

Cantor Fitzgerald: Zscaler delivered upside on revenue, billings, operating income, and free cash flows, Lee said.

The stock came under pressure “due to what we believe is sequential q/q weakness in F3Q24 billings-growth guidance of negative 7%,” the analyst stated, while adding that this has historically been the seasonally weakest quarter for Zscaler.

BMO Capital Markets: Although Zscaler’s billings growth was healthy, it marked a slowdown to 27% year-on-year and from 34% in the previous quarter, Bachman stated.

“We believe that ZS’s federal business continues to drive outsized impact to billings,” the analyst said. “We think that ZS’s new account-centric and vertical-based selling programs can help drive commercial business growth, though we think these initiatives will take time.”

Piper Sandler: “Upside to both top- and bottom-line metrics punctuated a solid F2Q, driven by sales success within the broader platform coupled with a strong federal quarter and a record new customer acquisition in 2Q,” Owens wrote.

The guidance reflects a degree of macro uncertainty and recent changes in the company’s sales leadership, the analyst said. He added that the 8% selloff in the aftermarket has set up the stock for a “solid buying opportunity.”

Stifel: A beat across all key metrics was delivered in the fiscal second quarter, “with growing traction across Zscaler's portfolio, strength in large customers, a healthy Federal quarter, and record F2Q new logos,” Borg said.

“Additionally, while management remains prudent regarding leadership change dynamics, FY24 guidance was raised across the board by more than the beat,” he added.

Scotiabank: “Zscaler machine is humming along nicely, beating in 2Q on key top and bottom line metrics and most importantly raising F24 billings growth,” Colville wrote.

“Management increased guidance by roughly the size of the beat - which we’d characterize as good enough,” the analyst said. “The company is not seeing any cyber spending fatigue from customers."

JMP Securities: Zscaler reported a solid quarter, with non-GAAP earnings of 76 cents on revenue of $525 million beating the consensus estimates, Walsh said.

“As Zscaler continues on its stated path toward $5BN in ARR, we would anticipate changes to key components of the business in order to facilitate that growth and scale,” he added.

Truist Securities: “ZS continued its strong momentum with solid results in 2FQ24 in a challenging macro environment, affirming its goal of balancing growth and profitability,” Fishbein said.

“We believe the guidance is prudent and is reflective of the GTM sales leadership transition as opposed to any weakness in demand, which the company mentioned is strong as it is signing more multi-year and multi-pillar deals,” he further wrote.

Needham: “Zscaler continues to execute superbly even as it starts a GTM transition to account- centric selling with the new Sales leader from Service Now,” Henderson stated.

Zscaler delivered a strong quarter and offered full-year guidance ahead of Street estimates, the analyst stated. “Management sounded highly confident on the call and on the callback,” he added.

KeyBanc: Zscaler indicated strong growth in the Federal vertical and “added it sees no slowdown, including in cabinet level agencies, both civilian and defense,” Heath said.

“In our view, F2Q results and guide were solid but are likely not enough to dispel concerns on Palo Alto's PANW comments of "cybersecurity spending fatigue" and its strategy to be more aggressive on discounting, even if it's more targeted at endpoint/XDR near term,” he added.

ZS Price Action: Shares of Zscaler had declined by 5.86% to $227.78 in the premarket session on Friday.

Now Read: Palo Alto Networks Shares Shake 'Spending Fatigue' Claims As Investors Remain Bullish On Cybersecurity

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