What happened
Zscaler (ZS 1.04%) shareholders had a good day on Friday, as their stock gained 9% by 11:30 a.m. ET, compared to a 1% rally in the S&P 500. The enterprise software services specialist is now up over 30% so far in 2023, while the wider market is up roughly 11%.
Friday's rally came as Wall Street cheered Zscaler's fiscal Q3 report that showed strong growth paired with steps toward profitability.
So what
Sales in the Q3 period that ended in late April were up 46% thanks to strong demand for products like Zscaler's core cybersecurity platform. The resulting $419 million of revenue was well ahead of management's early-March prediction of sales of between $396 million and $398 million.
Executives highlighted several encouraging growth trends, including a tilt toward larger enterprise contracts, rising annual contract spending, and high renewal rates. It's encouraging that these gains occurred even as the company made moves to cut costs.
That combination of positive trends powered a big step toward profitability, too. Net loss declined to $56 million, or 13% of revenue, compared to $86 million, or 30% of revenue a year ago.
Now what
Zscaler's short-term forecast was music to Wall Street's ears. Management is targeting another strong sales period in the current quarter, likely resulting in fiscal 2023 sales of about $1.59 billion. That annual target stood at $1.56 billion in early March. Zscaler also boosted its annual non-GAAP (generally accepted accounting principles) earnings outlook.
The stock didn't look especially cheap before this rally, and it has jumped to an even bigger premium. Shares are now trading for over 15 times annual sales, up from a P/S ratio of 9 in early May. Still, Zscaler's momentum in sales, cash flow, and profitability all contribute to its growth stock status. Continued wins in these areas could support additional positive returns for shareholders from here.
