What happened
Shares of Zscaler (ZS +0.11%) rose 12.7% in June, according to data provided by S&P Global Market Intelligence, thanks to favorable market conditions and momentum from great earnings and positive media attention in May. Zscaler's June results weren't driven by any news in the month -- investors were just bullish about enterprise software-as-a-service stocks and cybersecurity.
So what
Zscaler provides cloud-based cybersecurity solutions that are implemented at data centers, primarily by enterprise customers. Cybersecurity was a popular topic among investors and executives in May following the Colonial Pipeline attack. Zscaler then closed out the month with its third-quarter earnings report. It smashed analyst estimates and substantially increased guidance for the full year.
Image source: Getty Images.
There wasn't any major news about Zscaler in June, but the momentum from the prior month carried over. Software companies performed well across the board, and cybersecurity stocks had an especially strong month. Zscaler's returns were highly correlated to peers CrowdStrike Holdings, Fortinet, and Okta.
ZS Total Return Level data by YCharts
Now what
Investors rotated from growth stocks to value stocks early in the year, but it seems that there's a renewed appetite for risk in the market as economies recover and the Federal Reserve's timeline becomes more clear. That's always subject to change, but growth stocks are enjoying a positive stretch at the moment.
Zscaler's revenue rose 56% during the first nine months of its fiscal year. That rapid pace of expansion is expected to accelerate. This week, the Pentagon awarded a success memo to Zscaler as a potential vendor, which could be a big win for the company. It seems as if the sky is the limit for Zscaler, and the stock could easily continue climbing if it keeps up this tremendous revenue growth.
Nonetheless, the valuation has moved into speculative territory, which increases the short-term risk for investors. The stock's forward P/E ratio is now above 400, and price-to-book is nearly 60. That's by no means absurd for a promising growth stock, but it could easily tumble if the market starts getting rocky as interest rates slowly rise. Anyone buying Zscaler should have a tolerance for high volatility and recognize that it only makes sense if you're in it for the long haul.
