What happened
Shares of Zscaler (ZS 0.42%) were falling today after the cloud-based cybersecurity company got downgraded by Morgan Stanley.
As of 1:36 p.m. ET, the stock was down 4.1%.
So what
Zscaler, which provides a VPN alternative that gives companies secure gateways to connect, pulled back today after Morgan Stanley lowered its rating to equal weight from overweight, citing near-term caution in the cybersecurity market.
Analyst Hamza Fodderwala said that though cybersecurity is more recession-proof than other IT areas, the sector is likely to see earnings estimates revised lower, reflecting the weak performance in software over the second half of 2022. Fodderwala also said channel checks showed demand taking a meaningful downturn in October and getting worse since then. The analyst lowered the price target on Zscaler from $162 to $120.
Zscaler announced strong growth in its most recent report with revenue jumping 54% to $355.5 million, showing demand remains strong in the cybersecurity market, but like other cybersecurity stocks, it's fallen sharply over the past year, down 62%.
Like a lot of software-as-a-service peers, the company is also unprofitable under generally accepted accounting principles (GAAP), which has been a headwind in a rising interest rate environment.
Now what
Zscaler's challenges last year seemed to have more to do with the company's valuation rather than its performance as it traded at a price-to-sales ratio near 50 at the start of 2022, though that ratio has shrunk to 12 after the stock's plunge and its revenue growth last year.
Tech companies continue to warn of headwinds in 2023. Logitech International cut its guidance last night due to weak demand in the enterprise tech market, and chip giant Taiwan Semiconductor Manufacturing also warned of softness in the end consumer market in its earnings report this morning.
Given that environment, it wouldn't be surprising to see the company's growth continue to moderate, but its margins are improving. Zscaler should recoup some of last year's losses when market sentiment starts to improve.
