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Why Zscaler Stock Skyrocketed 46% in May

By Beth McKenna – Jun 8, 2020 at 11:00AM

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Shares of the cloud-based security company are getting a tailwind from the COVID-19 pandemic.

What happened

Zscaler (ZS 2.16%) stock soared 46.2% in May, according to data from S&P Global Market Intelligence. For context, the S&P 500 returned 4.8% last month.

Shares of the cloud-based security platform operator have cooled off so far in June. They gained 1.2% last week, compared with the broader market's 5% return.

In 2020, shares of Zscaler -- which held its initial public offering (IPO) in March 2018 -- have gained 114% through Friday, June 5. The market is flat over this period.

A digital padlock floating above a laptop that a woman's hands are typing on -- concept for cybersecurity.

Image source: Getty Images.

So what

Zscaler stock was trading up by roughly 10% to 15% throughout much of May, which we can attribute to investor optimism about the company's growth prospects in light of the COVID-19 pandemic.

But the big catalyst for the stock's powerful performance was Zscaler's May 28 release of its fiscal third-quarter 2020 results, which crushed Wall Street's earnings expectations and delighted investors. Shares popped 29.4% the next day. 

In Q3, revenue surged 40% year over year to $110.5 million, driven by Zscaler Private Access usage increasing over 10 times. The company is benefiting from the huge rise in the number of people working from their homes following shelter-in-place orders instituted throughout much of the world in March to help slow the spread of COVID-19. Employers need to make sure all the folks working from home have secure means of remotely accessing the internet and business applications they need to do their jobs. 

On the basis of generally accepted accounting principles (GAAP), Zscaler recorded a net loss of $19.3 million, or $0.15 per share, versus a net loss of $12.2 million, or $0.10 per share, in the year-ago period.

Adjusted for one-time items, net income landed at $9.0 million compared with $7.4 million in the year-ago period, which translated to earnings per share (EPS) jumping 40% to $0.07. This result trounced the Wall Street consensus estimate of $0.02.

Now what

Management raised its full-year guidance for both the top and bottom lines. For fiscal year 2020, revenue is expected to be $422 million to $424 million, representing growth of 40% year over year at the midpoint. Prior guidance was for revenue of $414 million to $417 million. 

Management now projects adjusted EPS of $0.20 to $0.21, or a slight contraction from $0.22 in fiscal 2019. The prior outlook was for adjusted EPS of $0.14 to $0.16. EPS isn't expected to grow in line with revenue because the company is investing in growth initiatives.

Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zscaler. The Motley Fool has a disclosure policy.

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