Up 96% over the past 12 months, and up around 40% year-to-date, has the ship sailed with Zscaler (NASDAQ:ZS) stock? Not necessarily.
Yes, after their incredible run, shares in the cloud security play will, at best, likely see more modest gains in the short-term. That does not mean it’s ceasing to be a growth story as post-COVID recovery unfolds.
The lockdown environment may be over in the U.S. and other major economies. Yet, the increased prevalence of remote work is not going anywhere.
As a hybrid office environment becomes more common, this secure web gateway provider will keep on benefiting from increased demand. Not only that, new opportunities are opening up, which will help to extend its growth runway.
That said, growth is not the only thing that’s running high. Valuation is as well. I am bullish on the stock. (See ZS stock charts on TipRanks)
ZS Stock: Continuing to Grow after Reopenings
As its most recent quarterly results show, the “return to normal” following last year’s pandemic lockdowns hasn't resulted in much of a slowdown in Zscaler's growth.
Revenue for the quarter ending July 31, 2021, jumped 57% year-over-year. Billings were up 70% from the prior year. Adjusted earnings per share for ZS stock also saw a sharp increase. Earnings per share (EPS) climbed from $0.08 to $0.14 cents year-over-year.
With demand for its services still high, and the company pursuing new markets, it will likely carry on seeing elevated rates of revenue and earnings growth in the years ahead.
Again, this is clearly more than accounted for in its rich valuation. While this could weigh on the stock in the near-term, investors looking at this as a long-term play shouldn’t view this as a deal breaker.
Valuation Concerns May Be Overblown
ZM has a premium valuation, with a forward price-to-sales, or P/S, ratio of 38.7x, and forward price-to-earnings, or P/E, ratio of 492.7x. Yet, this may not be cause for concern.
First, Zscaler is making moves now that will enable it to level up further. For instance, it is targeting growth among larger enterprise customers. In addition, the company is moving beyond its main endpoint security business into new areas like cloud app security.
Second, as it scales up , its operating margins are projected to see big improvement in the coming years. Adjusted operating margins could climb to 20%-22% within the next three years.
Keep in mind though, this doesn’t mean shares are about to see another major jump in price. Gains from here could be more gradual. A temporary drop in price may be on the horizon as well.
What Analysts are Saying About ZS Stock
According to TipRanks, ZS stock has a consensus rating of Moderate Buy. Out of 23 analyst ratings, 16 rate it a Buy, and seven analysts rate it a Hold.
The average ZS price target $309.43 per share, implying 13.3% potential upside. Analyst price targets range from a low of $225 per share, to a high of $345 per share.
Bottom Line
Zscaler's valuation today may be rich. Yet, with its strong position in the secure web gateway space, and exposure to the corporate world’s increasing cybersecurity needs, it may be worth the price.
Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.
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