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Zscaler: A Leader in Cybersecurity Soars with Strong Earnings

Cybersecurity firm Zscaler Inc. (NASDAQ: ZS) has been forming a bullish consolidation along its 10-week moving average, posting these recent price advances. 

  • One month: 1.58%
  • Three months: 9.97%
  • Year-to-date: 43.78%

The stock is a leader in the cybersecurity subindustry within the tech stock sector. The tech sector as a whole notched a small rally in the past week as yields have been rising, meaning investors are turning to more risky stocks rather than dividend payers.

On September 5, Zscaler reported better-than-expected fourth-quarter revenue and earnings. You can see those results using MarketBeat’s Zscaler earnings data.  

It marked the sixth quarter in a row that the company beat top- and bottom-line views. 

Cybersecurity Industry Posting Big Growth

Zscaler is one of four stocks in the cybersecurity sub-industry that’s posted strong price action and earnings growth recently. It’s in good company, as those other stocks are large-caps Palo Alto Networks Inc. (NASDAQ: PANW), CrowdStrike Holdings Inc. (NASDAQ: CRWD) and mid-cap Qualys Inc. (NASDAQ: QLYS).

Zscaler specializes in cloud security solutions to protect business customers against a wide range of online threats and security risks. The company’s core innovation is its cloud-native security platform, which allows direct access to applications and services regardless of a user's location or device.

MarketBeat’s Zscaler analyst ratings show a “moderate-buy” consensus on the stock, with a price target of $181.40, an upside of 19.77%.

To use a technical term, analysts have gone bananas since Zscaler reported earnings. Twenty-one analysts either upgraded the stock or boosted their price targets.

As a whole, the cybersecurity industry is well positioned, as a flurry of new networking services are being rolled out, and enterprise clients will need the added protection.  

Zscaler Services Well Suited for Remote Work

Zscaler has a specialization in a corner of the cybersecurity industry known as Secure Access Service Edge, which is especially well-suited for companies with remote workers or far-flung branch locations.

It delivers that service through its Zscaler Zero Trust Exchange, a cloud-native platform. 

In the most recent earnings report, Zscaler CEO Jay Chaudhry said, “With cyber security as a high priority, IT executives are modernizing their legacy network security with our zero-trust architecture.” 

Zero-trust architecture is a cybersecurity framework that operates on the principle of "never trust, always verify" to flip a famous saying on its head.

Zero-trust assumes that threats exist both inside and outside a network. It requires continuous authentication and verification of every user, device, and application that attempts to access network resources, regardless of location.

Global Cybersecurity Spending Set to Grow

In a September 28 report, tech research firm Gartner forecast that global cybersecurity and risk management spending will grow by 14% in 2024, to a total of $215 billion. 

“The continuous adoption of cloud, continuous hybrid workforce, rapid emergence and use of generative AI (GenAI), and the evolving regulatory environment are forcing security and risk management (SRM) leaders to enhance their security and risk management spending,” said Shailendra Upadhyay, senior research principal at Gartner. 

Analysts see Zscaler participating in that growth, with earnings expected to grow by 25% next year to $2.24 a share. In 2024, that’s seen growing by another 26% to $2.83 per share. 

In regulatory filings, Zscaler lists competitors as including Check Point Software Technologies Ltd. (NASDAQ: CHKP), Fortinet, Inc. (NASDAQ: FTNT), Palo Alto Networks, Broadcom Inc. (NASDAQ: AVGO), Cisco Systems, Inc. (NASDAQ: CSCO), Microsoft Corp. (NASDAQ: MSFT) and Juniper Networks, Inc. (NYSE: JNPR), depending on the particular product or service.

Factoring in High P/E

The stock is currently actionable as it’s trending along its 50-day line until it reaches $175.88, which is 5% above its September 11 high of $167.50. 

One thing that some investors may find unsettling is that Zscaler has a price-to-earnings ratio of 90, meaning that investors are willing to pay $90 for every $1 of the company's earnings. This high P/E ratio means the stock is relatively expensive compared to its current earnings. 

While that seems rich, it’s not unusual for stocks with high growth potential to be trading at high multiples. A lofty P/E suggests that investors have high expectations for the company's future growth potential, which you can also verify by the optimistic analyst price and earnings forecasts.

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