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Why Zscaler Stock Popped Today

By Timothy Green – Dec 6, 2018 at 8:20AM

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A strong earnings report earlier this week and progress in the federal government market have lit a fire under the stock.

What happened

Shares of cloud security provider Zscaler (ZS 7.17%) were up about 12.1% at 12:20 p.m. EST Thursday. The company reported solid first-quarter results and provided upbeat guidance on Tuesday, which may be contributing to the rally. Zscaler also announced on Thursday that it was one of four cloud service providers chosen to pursue JAB certification through the FedRAMP Connect Program. The company believes this will "set the stage to further expand Zscaler's growth within the Federal market."

So what

Zscaler reported first-quarter revenue of $63.3 million, up 59% year over year and nearly $5 million above the average analyst estimate. The company turned a non-GAAP net profit of $0.01 per share, up from a net loss of $0.07 per share in the prior-year period and $0.06 ahead of analyst expectations. A mix shift toward higher-priced bundles boosted gross margin and helped push up the bottom line.

An electronic cloud.

Image source: Getty Images.

Zscaler's guidance also impressed. The company sees second-quarter revenue between $65 million and $67 million and full-year revenue between $268 million and $272 million. Both ranges were above analyst estimates of $61.6 million and $259.0 million, respectively.

These strong results may be part of the reason why Zscaler stock is rising. The company's announcement that it has been chosen to pursue Joint Authorization Board FedRAMP certification may be another. The prospect of Zscaler winning more federal government business could be giving investors reason to bid up the stock.

Now what

Zscaler is a small player in the larger cybersecurity market, with expected revenue of less than $300 million in 2019. Gartner estimates that global information security spending will surpass $124 billion in 2019, so Zscaler's growth runway extends far into the future. The stock is expensive relative to sales, with a market capitalization of roughly $5 billion. But the growth potential may justify a premium valuation.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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