Cybersecurity Stock Zscaler's Impressive Q3 Print And Federal Expansion Boost Analyst Confidence

Zinger Key Points
  • Zscaler shares rise after beating Q3 earnings estimates, driven by strong demand and solid execution.
  • Analysts remain optimistic, citing robust demand, improved revenue diversification, and higher guidance for Q4 and fiscal 2025.

Zscaler Inc ZS shares are trading higher after the company reported better-than-expected third-quarter earnings Thursday.

Oppenheimer analyst Ittai Kidron reiterated Zscaler as an Outperform and lowered the price target on software industry multiple compression from $290 to $260.

Zscaler reported solid fiscal third-quarter 2024 results, beating estimates behind broad-based demand, solid execution, and operating leverage, Kidron noted. The company saw strong adoption of its user bundle, substantial expansion of >$100K/>$1M ARR customers, no change to competition, and strength in the Federal vertical.

While macro remains challenging, and there was higher sales attrition during the quarter, Kidron noted guidance for the fourth quarter and expectations into fiscal 2025 are conservative, creating a positive setup for the upside. Additionally, given its technological leadership as a zero trust platform, Kidron noted Zscaler is well positioned to address a significant market opportunity and increase penetration for its emerging products.

Cantor Fitzgerald analyst Yi Fu Lee maintained a Neutral and lowered the price target from $230 to $200, which was in line with the peer-group average trading multiple, following a robust set of third-quarter results.

Mizuho analyst Gregg Moskowitz maintained a Buy and lowered the price target from $240 to $220 on lower comp multiples.

Moskowitz said that amid a great deal of malaise in the software sector, Zscaler reported a stunningly good quarter that far exceeded investor expectations. Management also cited a much better-than-expected contribution from its emerging products and raised its full-year outlook.

More broadly, the analyst noted that Zscaler remains very well positioned for growth and that its unique cloud proxy security architecture should enable it to thrive in an increasingly digital-enabled world. He also continues to expect significant improvements in monetization going forward.

BMO Capital analyst Keith Bachman maintained an Outperform and raised the price target from $192 to $208, given higher confidence in reaching the July quarter and fiscal 2025 estimates.

Bachman said Zscaler delivered more upside than he anticipated in the April quarter, which eases the glide path to achieving the July billings targets. He is also impressed with growing revenue diversification, which he noted will help support durable growth through upsell, cross-sell, and larger lands.

Needham analyst Alex Henderson reiterated a Strong Buy and a $290 price target. Henderson noted that Zscaler is transitioning to a new CRO, and the third quarter was the pivot point in these investments.

With the departure of the prior CRO, sales attrition was higher than expected, yet despite this and challenging macro conditions that have led to several software companies missing numbers, Zscaler’s third quarter managed to beat guidance with upside to revenue and billings, the analyst said.

Further, Zscaler raised guidance for the fourth quarter and accelerated its sales hiring motion. He stated that the solid results and guidance reflect robust demand to transition the Enterprise to a Cloud Direct, authentic Zero Trust architecture. Henderson said that Zscaler noted larger deal sizes, strong upsell, and robust Fed demand in the quarter.

Zscaler expects the step-up in hiring to take time to accelerate growth and called out a slight fiscal 2025 billings headwind. Henderson noted Zscaler is oversold and said this is a strong entry point.

Truist Securities analyst Joel P. Fishbein Jr. reiterated a Buy with a price target of $260.

Fishbein noted that Zscaler continued to deliver exceptional results in the third quarter in a challenging macro environment despite higher-than-expected sales attrition, affirming its goal of balancing growth and profitability.

As per the analyst, billings were the key metrics investors focused on, significantly beating consensus estimates and the primary reason for the stock being up 17% aftermarket. He noted that the updated fiscal 2024 guidance is prudent and reflects the GTM sales leadership transition, while demand is vital as it is signing more multi-year and multi-pillar deals.

Piper Sandler analyst Rob D. Owens maintained an Overweight with a price target of $255. Amidst a difficult macro for software companies and, more broadly, a slow start to the year for most, Zscaler delivered a third-quarter solid result with a beat and raise for the ensuing quarter, Owens noted.

The analyst said that the acceleration of the core platform has led to large deal success and broader traction with emerging products. He added that optimism was carried through in a strong guide for the fourth quarter despite baking in some level of conservatism in fiscal 2025 for the recent GTM transition.

Stifel analyst Adam C. Borg maintained a Buy with a price target of $220.

Despite a tough software tape coupled with negative, company-specific sentiment across a number of dimensions, Zscaler offered a better-than-feared print, with all key metrics above guidance, Stifel and Street estimate given solid execution, ongoing Federal traction, growing momentum with newer products, and continued prioritization of its zero-trust portfolio.

Borg noted Zero Trust as an essential cybersecurity priority, and Zscaler’s leading portfolio helps improve an organization’s security posture, drive vendor consolidation, and reduce costs. The analyst notes Zscaler has several drivers to sustain at least 20%+ growth and margin expansion in the coming years.

Goldman Sachs analyst Gabriela Borges maintained a Neutral rating and a price target of $189, down from $215, reflecting peer multiple compression.

Zscaler is navigating the current environment well, both concerning macro and its next phase of scaling into a broader multi-product company, and he noted the reset to fiscal 2025 would help create a floor to the stock. To become more constructive, the analyst looks to gauge how quickly Zscaler can ramp up its next phase of cross-sell efforts in the context of incremental competition in its core ZIA product to drive reacceleration in fiscal 2026 vs. further deceleration.

Price Action: ZS shares are trading higher by 7.18% to $167.90 at last check Friday.

Photo via Shutterstock

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