What happened
Zscaler (ZS -2.17%) stock fell more than 16% last month following its quarterly earnings report on Dec. 1. Even though its results exceeded expectations, the cybersecurity stock couldn't overcome fears about slowing growth in the tech sector. Zscaler slumped further throughout December amid broader market weakness.
So what
The market's reaction to Zscaler earnings is confusing at first glance. The company reported 54% revenue growth along with a 55% increase in deferred revenue, which is a measurement of signed contracts that will be recognized in the future. It also provided slightly higher gross margin relative to the prior year. Zscaler was still unprofitable on a generally accepted accounting principles (GAAP) basis, but it produced positive cash flows, with nearly $130 million in cash from operations last quarter. Even though the company isn't profitable, it's achieving excellent growth without burning cash.
It's not a case of falling short of lofty expectations, either. Zscaler beat analyst forecasts for both sales and adjusted income. The company's guidance met Wall Street forecasts for revenue and adjusted earnings.
Image source: Getty Images.
Despite all of that positive news, the stock still tumbled. The market is fearful right now, and the global economic outlook is poor. Tech stocks are fighting an uphill battle, as new rounds of huge layoffs are hitting the headlines every week. Investors might be focused on Zscaler's growth rate, which has slowed slightly despite remaining at a high level. The company is also relying heavily on billings in the back half of the year to hit its growth targets, which could be jeopardized if global economic conditions keep deteriorating.
Now what
Zscaler stock is the cheapest that it's ever been relative to the business fundamentals. Its price-to-sales ratio is around 13, which is the lowest level in the stock's history.
ZS PS Ratio data by YCharts
It's still fairly expensive relative to cash flows and forward adjusted earnings, but the 50% revenue growth rate commands a premium. On a growth-adjusted basis, Zscaler's forward valuation ratios aren't particularly high.
There could be rough times ahead for Zscaler as it navigates global economic choppiness and capital markets that are being disrupted by high interest rates. Still, the company is a leader in edge security, which is an important and high-growth industry. Growth investors should consider this cybersecurity stock for long-term returns.
