Zscaler Plunges 19% on Dim Profit Outlook: How to Play the Stock?

Core Viewpoint - Zscaler, Inc. experienced an 18.7% stock decline following the release of its fourth-quarter fiscal 2024 results, primarily due to disappointing profit outlook despite strong revenue and earnings growth [1] Group 1: Financial Performance - Zscaler reported a 30% year-over-year revenue growth, reaching $593 million, with a full-year revenue growth of 34$1 billion and annual recurring revenues (ARR) reaching $2.5 billion [2] - The operating margin was reported at 22% and free cash flow margin at 23% for the fourth quarter [6] Group 2: Market Position and Competitive Landscape - Zscaler holds a leading position in the zero-trust security market, serving over 8,700 customers and protecting nearly 50 million users globally [3] - The company's cloud-native platform differentiates it from competitors like Palo Alto Networks, Fortinet, and CrowdStrike, especially as zero-trust architectures become a security standard [4] Group 3: Profitability Concerns - The market's negative reaction was largely due to Zscaler's guidance for fiscal 2025, projecting billings growth to decelerate to 19%-20%, down from 27% in fiscal 2024, which is expected to compress profit margins [6] - CEO Jay Chaudhry emphasized that the shift in profitability is linked to aggressive investments in AI and cloud infrastructure rather than a fundamental business weakness [7] Group 4: Growth Opportunities - Zscaler is enhancing its AI-driven analytics, which is expected to drive upselling opportunities and strengthen its market position [8] - The demand for zero-trust security platforms is increasing due to rising cyberattacks, positioning Zscaler to capitalize on this trend with its cloud-native architecture [9] - The company is seeing strong momentum in emerging products like AI analytics, with generative AI solutions gaining traction [10] - Zscaler has expanded its presence in the federal market, securing a new cabinet-level agency as a client, which may enhance its foothold in the public sector [11] Group 5: Valuation and Technical Indicators - Zscaler's current valuation raises concerns, as it trades at a premium to the Zacks Internet – Services industry average based on a one-year forward price-to-sales (P/S) ratio [12] - The stock has dipped below its 50-day and 200-day moving averages, indicating potential downward pressure in the short term [13] Group 6: Conclusion - The recent stock price decline is viewed as an overreaction to short-term profitability concerns, with strong growth prospects due to Zscaler's market position and AI-driven initiatives [14]