Zscaler Q4 Revenue Jumps 46% on COVID-19 Work-From-Home Sales; Target Price $145

Zscaler Inc, a cloud-based information security company headquartered in California, reported revenue growth of 46% year-over-year to $125.9 million in the fourth quarter as working from home during the COVID-19 pandemic forced several companies to upgrade VPNs, sending its shares up about 1% on Wednesday.

The biggest provider of cloud-based web security gateways, for the full-year fiscal 2020, reported revenue growth of 42% year-over-year to $431.3 million. GAAP net loss was $49.5 million, compared to $5.3 million in the fourth quarter of fiscal 2019. Deferred revenue surged to $369.8 million as of July 31, 2020, an increase of 47% year-over-year.

Zscaler forecasts total revenue between $131 million to $133 million for the first quarter of fiscal 2021 and between $580 million to $590 million for the full-year fiscal 2021.

“We believe that recent sales and development investments are taking hold with the market. With our expectation for higher revenue growth in the coming years due to landing new clients and up-selling within existing customers, we are raising our fair value estimate to $111 per share from $72. We view shares as overvalued and advise investors to wait for a pullback,” said Mark Cash, equity analyst at Morningstar.

Zscaler’s shares closed about 1% higher at $134.19 on Wednesday; the stock is up about 200% so far this year.

Executive comments

“Businesses are digitally transforming at a pace never seen before, and this is fueling adoption of the Zscaler Zero Trust Exchange platform and our strong fourth quarter and fiscal year results,” said Jay Chaudhry, Chairman and CEO of Zscaler.

“In the new work-from-anywhere economy, where legacy network and security is an inhibitor, organizations are turning to our Zero Trust Exchange for the right architecture to enable success and create competitive advantage in this cloud and mobile world. I’m proud of our go-to-market execution and of the new innovations we are rapidly delivering on our platform to help our customers succeed.”

Zscaler stock forecast

Eleven analysts forecast the average price in 12 months at $145.64 with a high forecast of $198.00 and a low forecast of $102.00. The average price target represents an 8.53% increase from the last price of $134.19. From those 11 analysts, seven rated “Buy”, four rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $123 with a high of $184 under a bull-case scenario and $70 under the worst-case scenario. D.A. Davidson raised their stock price forecast to $155 from $105 and Credit Suisse upped their price objective to $140 from $90.

Other equity analysts also recently updated their stock outlook. Zscaler had its target price increased by Royal Bank of Canada to $141 from $130. The brokerage currently has an outperform rating on the stock. Loop Capital set a buy rating and a $160.00 price target. BMO Capital Markets boosted their price target to $137 from $105. Wedbush boosted their price target to $150 from $100 and gave the company an outperform rating.

We think it is good to buy at the current level and target $145 as 100-day Moving Average and 100-200-day MACD Oscillator signal a strong buying opportunity.

Analyst views

“Zscaler’s (ZS) cloud-based security platform appears well positioned in light of modern computing architectures, which have enabled rapid share gain in its core web security market with expansion opportunities to capture the broader $18 billion network security TAM. This sets up a long runway of 20%+ growth, with attractive unit economics supporting 30%+ op. margins long-term,” said Keith Weiss, equity analyst at Morgan Stanley.

“However, while software multiples have meaningfully re-rated, ZS current valuation of 29X CY21 EV/Sales, 0.89X growth-adjusted remains well ahead of security peers (10X, 0.50x), which along with continued competitive risk keeps us on the sidelines at current levels,” Weiss added.

Upside and Downside Risks

Upside: 1) Zscaler sees accelerating customer adds and greater than expected traction with its Transformational suites which includes the replacement of network firewalls. 2) Faster than expected traction with ZPA.

Downside: 1) Increased competitive pressure from larger firewall vendors, particularly Palo Alto Networks. 2) Long sales cycles due to the transformational nature of ZS offering. 3) High investor expectations embedded in valuation.

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