Zscaler Shares Fall Despite Raised Guidance. Is It Time to Buy the Stock on the Dip?

Core Viewpoint - Zscaler's stock has declined approximately 10% in 2024 despite reporting solid revenue growth and increasing guidance, raising questions about the justification for the price dip and potential buying opportunities [1][2]. Financial Performance - For the fiscal first quarter ended October 31, Zscaler reported a revenue increase of 26% year over year, reaching $628 million, surpassing the previous guidance of $604 million to $606 million [3]. - Adjusted earnings per share (EPS) rose to $0.77 from $0.55 a year ago, exceeding the forecasted range of $0.62 to $0.63 [5]. - The company generated operating cash flow of $331.3 million and free cash flow of $291.9 million, ending the period with $2.7 billion in cash and short-term investments, alongside $1.15 billion in debt [6]. Growth Metrics - Calculated billings growth was only 13% year over year, totaling $516.7 million, which disappointed investors, although deferred revenue increased by 27% to $1.78 billion [4]. - Zscaler maintained a dollar-based net retention rate of 114%, indicating strong growth within its existing customer base [7]. Guidance and Forecast - Zscaler raised its full-year revenue guidance to a range of $2.623 billion to $2.643 billion, up from $2.6 billion to $2.62 billion, and adjusted EPS guidance to $2.94 to $2.99 from $2.81 to $2.87 [8][9]. - For fiscal Q2, the company forecasts revenue between $633 million and $635 million, with adjusted EPS between $0.68 and $0.69, aligning with analyst expectations [11]. Market Position and Strategy - The company is experiencing strong upsells, particularly in its Zscaler Private Access (ZPA) business, and is seeing traction in emerging solutions like Zscaler Digital Experience (ZDX) and AI analytics [7][13]. - Zscaler is focusing on new AI solutions and has secured a deal to protect Microsoft Copilot data, indicating potential growth in data security [13]. Valuation - Zscaler trades at a forward price-to-sales multiple of approximately 9.6, which is considered attractive given its revenue growth rate exceeding 25% [14].