Is ZScaler a Millionaire Maker Stock?

As fraud has grown rampant over the past few years, cybersecurity has become a critical consideration for every organization. Fraud solutions that can combat modern-day bad actors have increasingly come to rely on two important innovations: artificial intelligence and cloud computing.

One of the companies that has emerged out of the crowded cybersecurity field is Zscaler (NASDAQ: ZS). The company’s flagship product is its Zero Trust Exchange, which treats every interaction as a suspicious activity.

Each time an employee logs on, Zscaler’s platform analyzes the individual’s credentials, device, and location to ensure the right person gains access.

The company’s powerful platform drove ZS share price up by over 1,000% from Zscaler’s 2018 IPO to late 2021, but it took a step back in 2022 alongside most other technology names.

While ZS hasn’t come close to reaching the heights of a few years ago, it has begun to bounce back since hitting bottom last year. ZScaler share price is up by 18.4% over the past 12 months alone but down 12% year-to-date. So is time to be bullish or bearish?

Losses Made Shareholders Nervous But Future Is Bright

Though Zscaler beat revenues and earnings expectations in each of the past four quarters, the company gave muted guidance for fiscal 2025, and that turned some investors off. However, the recent selloff is likely to work in investors’ favor if they have a longer term outlook because Zscaler has some of the hallmarks of a millionaire-making stock.

The lowered guidance cast a pale over what was otherwise a strong earnings release for the fiscal 4th quarter of 2024. Revenues of $592.9 million represented a 30.3% year-over-year improvement and also beat analysts’ expectations by 4.5%.

Though the company suffered a loss in the quarter, the $14.88 million figure in the red was 51.5% better than the $30.7 million number from the same quarter of last year.

Diluted earnings per share worked out to -$0.10, which was 27% better than analysts had predicted. Cash and cash equivalents of $2.4 billion at the end of the quarter up more than $300 million versus the year prior.

For the full fiscal year, the company had $2.2 billion in revenues, up 34% year-over year. And Zscaler took a net loss of $57.7 million compared to its over $200 million loss in fiscal 2023.

“We ended a successful Fiscal 2024 with Q4 results exceeding the high end of our guidance across all metrics,” said Jay Chaudhry, Chairman and CEO of Zscaler. “Customers’ adoption of our Zero Trust Exchange platform is stronger than ever, and… we have achieved a major milestone with our cloud platform surpassing over half a Trillion transactions daily”

How ZScaler Is Using AI To Win

Cloud computing gives organizations global reach, but it also exposes them to a world full of bad actors. To combat that threat, Zscaler has incorporated AI at every turn.

The company’s new Risk360 solution uses AI to give businesses customizable security alerts, which surfaces fraudsters more efficiently and cuts down on false alarms. Risk360 also allows companies to dial down and do risk evaluations at the asset level.

Zscaler recently collaborated with Google Chrome Enterprise to bring threat detection and data protection to Google’s enterprise users, which number in the hundreds of millions.

With so much going right for Zscaler, the upside is large but the lowered guidance remains a concern. Management predicted FY 25 revenue of $2.61 billion, which was below analysts’ revenue estimates of $2.62 billion. The company’s EPS estimate of $2.84 was far below the expected $3.33.

Analysts’ Ratings For Zscaler Stock

The lowered guidance might have deterred some investors, but Wall Street analysts are still backing ZS.

Out of 44 analysts who have rated the stock, 30 assess it to be a Buy, and 5 of those analysts forecast that Zscaler shares will outperform the market over the next 12 months.

The highest price target for ZS is $270 per share, which translates to a 29.1% increase from where the stock currently trades. 

There isn’t currently a Sell rating on ZS, but there are 14 analysts who rate the stock as a Hold. The lowest forecast predicts Zscaler shares will slide by 10.3% to $165 in the coming year.

Is Zscaler Stock Undervalued?

While the analysts are largely in Zscaler’s corner, the stock’s price-to-sales ratio of 13.2x might give some investors pause.

With that said, it is still much lower than the P/S values of the company’s cloud-based cybersecurity competitors. Crowdstrike is trading at 21.8x sales, while Palo Alto Networks has a P/S multiple of 16x.

The selloff has put the stock at a substantial discount to where it was just a few years ago. In the company’s 2021 heyday, Zscaler’s P/S multiple soared to an astonishing 70x.

Is Zscaler Stock a Millionaire Maker?

Zscaler has 16.7% upside to fair value of $213 per share according to the consensus price target of 44 analysts so it’s unlikely to be a millionaire maker in the near-term.

The reason investors were so bullish a few years ago is there is a high demand for the company’s product that isn’t likely to decline. In fact, Zscaler’s research team analyzed ransomware attacks from April 2023 to April 2024 and found these attacks increased 18% year-over-year. The highest payout was $75 million, double the highest known ransomware payment.

While there will be increased demand for cybersecurity, there is also substantial competition in the space. Crowdstrike has been the leader in the industry, and it continues to dominate despite the massive blackout the company caused this summer. There is also competition from VMware, Palo Alto Networks, and a bevy of others.

Still, Zscaler is a compelling stock given the company’s positioning, products, and revenue and earnings growth. The decreased guidance might have deterred some investors, but it also means the stock has been sold off to a level that it is starting to look like a bargain.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.