Where Will Zscaler Stock Be in 1 Year? – The Motley Fool

For several years, Zscaler (ZS 1.15%) was one of the market’s hottest cybersecurity stocks. It went public at $16 per share on March 16, 2018, and eventually soared to an all-time high of $368.78 on Nov. 19, 2021. But today, it trades at about $175.

Like many other hypergrowth stocks, Zscaler lost its luster as its sales growth cooled off and rising rates compressed its valuations. But will its stock finally stabilize and perhaps even rally over the next 12 months?

How fast is Zscaler growing?

Zscaler develops “zero trust” services that treat everyone, including a company’s CEO, as a potential threat. Those tight security controls can shield an organization from remote hackers, disgruntled employees, and corporate spies.

The company provides its tools as cloud-based services that don’t require any on-site appliances. That lightweight approach is cheaper, easier to scale, and doesn’t require any on-site maintenance. It also locks its customers into sticky subscriptions.

That innovative approach enabled Zscaler to grow like a weed after its public debut. From fiscal 2018 to fiscal 2023 (which ended last July), the company’s calculated billings grew at a compound annual growth rate (CAGR) of 51% as its revenue rose at a CAGR of 53%. But over the past year, its top-line growth decelerated as it struggled to gain new customers and lock in higher-value contracts in a tougher macro environment.

Data source: Zscaler. YOY = year over year.

For the full year, Zscaler expects its calculated billings and revenue to rise 28% and 32%, respectively. It’s gradually raised its annual guidance over the past three quarters. For fiscal 2025, analysts expect its revenue to grow 23%.

Zscaler’s growth is cooling off, but its margins are also rising. In the first nine months of 2024, adjusted gross margin held steady year over year at 81% as adjusted operating margin expanded 7 percentage points to 20%. It attributed that expansion to tighter cost controls and a longer depreciable life cycle for its current cloud infrastructure.

The company expects adjusted earnings per share (EPS) to grow 67%-68% for the full year, which exceeds analysts’ expectations for 64% growth. But in fiscal 2025, analysts only expect 13% growth as the company laps its cloud life-cycle benefits and ramps up its investments again.

Why did Zscaler’s stock slump this year?

Zscaler is still growing as it gains more enterprise and government contracts, but it has two glaring weaknesses. First, it’s stayed unprofitable on a generally accepted accounting principles (GAAP) basis ever since its initial public offering (IPO), and analysts don’t expect it to turn a profit until fiscal 2026. Other cybersecurity leaders like CrowdStrike and Palo Alto Networks — which both bundle zero trust tools with their other services — are already generating stable GAAP profits.

Second, Zscaler’s stock isn’t a bargain at 52x its forward adjusted earnings and 10x next year’s sales. It’s not as overvalued as it was during the meme-stock rally in late 2021, but its upside potential might be limited at these levels.

As long as interest rates stay high and Zscaler’s revenue growth continues to decelerate, investors will probably avoid this stock. That may be why the stock tumbled more than 20% year to date and insiders sold nearly 10x as many shares as they bought over the past 12 months.

Where will Zscaler’s stock be in a year?

Zscaler is a resilient cybersecurity company that dominates a high-growth niche, but I believe its stock will trade sideways or slip lower over the next 12 months. The market needs to revalue it as a growth stock instead of a hypergrowth one, but that process will likely compress its valuations and weigh down its stock price.