What happened
Shares of Zscaler (ZS 0.05%) plunged 53.5% in the first six months of 2022, according to data provided by S&P Global Market Intelligence. That sell-off was much deeper than the first-half plunges of the S&P 500 and Nasdaq Composite, which tumbled 20.6% and 29.5%, respectively.
Here's a look at what caused the steep decline in the cybersecurity stock this year.
NASDAQ: ZS
Key Data Points
So what
On the one hand, Zscaler has delivered strong financial results this year thus far. The cybersecurity company reported its fiscal 2022 second-quarter results in late February and its fiscal third-quarter numbers in late May. The company grew its revenue at a 63% year-over-year rate in both periods, hitting $286.8 million in sales in Q3.
Zscaler also reported improving cash flow. Cash provided by operations was 19% of revenue in the second quarter and 27% in Q3, while free cash flow hit 15% of revenue in the third quarter. That growing free cash flow boosted the company's cash position to nearly $1.7 billion, representing a more-than-$155 million year-over-year increase.
However, while Zscaler posted strong financial results, analysts are becoming more cautious about what's ahead due to the potential for a recession and a slowdown in technology-related spending. Several reduced their price targets on the cybersecurity stock in recent months.
For example, Cowen analyst Shaul Eyal lowered his price target from $405 to $194 per share in late May. The analyst noted that while Zscaler posted strong results and cybersecurity risks are growing, he reduced the firm's price target due to multiple compression in the sector, as investors aren't willing to pay as high a price for growth stocks these days. Meanwhile, Canaccord analyst T. Michael Walkley made a similar move, lowering his price target from $320 to $210 a share due to ongoing multiple compression in the security software space. Several other analysts made similarly sizable price-target reductions, citing multiple compression as the key factor.
Now what
At their peak late last year, shares of Zscaler traded for more than 60 times sales. However, with the economy potentially heading for a slowdown, investors aren't willing to pay such a premium for growth stocks these days. As a result, Zscaler stock now trades closer to 25 times its sales.
While that's still a relatively high price, Zscaler has lots of growth ahead. The company sees a $72 billion opportunity to secure more users and workloads. With Zscaler topping $1 billion in annual recurring revenue earlier this year, the company has enormous growth potential. Because of that, this year's sell-off looks like an attractive opportunity for investors with a long-term mindset to buy shares of the fast-growing cybersecurity specialist at a much more reasonable valuation multiple.
