Zscaler Gears Up to Report Q2 Earnings: Should You Buy the Stock?

Core Viewpoint - Zscaler is set to report its second-quarter fiscal 2025 results, with expectations of revenue growth and a decline in earnings per share compared to the previous year [1][2][3]. Revenue Expectations - Zscaler anticipates revenues between $633 million and$635 million for the second quarter of fiscal 2025, with a Zacks Consensus Estimate of $634.1 million, indicating a year-over-year growth of 20.78$577.1 million and $56.2 million, respectively, with a remaining performance obligation of approximately$4.2 billion at the end of the quarter [10]. Earnings Projections - The company expects non-GAAP earnings per share in the range of 68-69 cents, with the Zacks Consensus Estimate also at 69 cents per share, reflecting a year-over-year decline of 9.2% [3][4]. Market Dynamics - Strong demand for Zscaler's security and networking solutions is expected to drive its second-quarter results, particularly due to the growth in the global security space and the adoption of its Zero Trust Exchange platform [7]. - The rising adoption of Software-Defined Wide Area Network (SD-WAN) solutions is projected to be a primary driver, with the market size expected to reach $80.91 billion by 2034, growing at a CAGR of 31.6$5.36 billion in 2024 [8]. Product and Customer Retention - Zscaler's core products, including Zscaler Internet Access and Zscaler Private Access, have been instrumental in customer retention, with new features added to its Zero Trust Exchange aiding in product portfolio expansion and customer acquisition [9]. Investment and Expenses - The company has seen a year-over-year increase of 15.6% in non-GAAP sales and marketing expenses and 31.6% in non-GAAP research and development costs, which may impact profitability in the near term [11]. - Zscaler has significantly increased its R&D expenses to enhance its cloud platform, which, while beneficial in the long run, is currently affecting margins and profit growth [19]. Stock Performance and Valuation - Over the past year, Zscaler's shares have decreased by 8.4%, underperforming the Zacks Security industry's growth of 22.3% and peers in the cloud-based security space [12]. - Zscaler's stock is currently trading at a forward 12-month price-to-sales ratio of 10.24X, which is lower than the industry's 13.71X, indicating potential undervaluation [14]. Long-term Outlook - The company is well-positioned to benefit from the increasing demand for cybersecurity solutions driven by data breaches and digital transformation strategies [16]. - A strong presence across various verticals helps mitigate the impact of macroeconomic challenges, and recent acquisitions have contributed positively to its portfolio [17].