What happened
Shares of Zscaler (ZS 1.28%) were up 30.7% during the first six months of 2023, according to S&P Global Market Intelligence. The cybersecurity stock's June earnings report beat expectations, causing investors to revise their forecasts. Increased risk appetite also lifted growth stocks, and that translated to gains for Zscaler and some of its peers.
So what
Zscaler enjoyed big gains in January thanks to optimism about economic recovery, but it gave them all back after its March earnings report. Despite topping analyst estimates to report a huge revenue growth and free cash flow figures, investors were concerned about the company's forward-looking guidance. High-growth, high-valuation stocks are highly sensitive to even lukewarm news.
Image source: Getty Images.
The stock was down 25% year to date at the start of May thanks to doubts about Zscaler's outlook, but that quickly flipped into positive momentum. On May 8, the company announced that it expected to exceed its own forecasts for its forthcoming quarterly report, and it increased its guidance for the full year. The stock continued to climb in June following its full quarterly-earnings report, which showed 46% growth and a significant decline in net losses. This caused investors to revise their revenue and earnings projections higher.
ZS EBITDA Estimates for Next Fiscal Year data by YCharts.
Fundamentals and improved outlook played a role in Zscaler's charge this year, but rising valuation ratios have also been impactful. The stock's price has surged higher relative to sales, free cash flow, and forecast earnings.
ZS PS Ratio data by YCharts.
Volatility is common for stocks like Zscaler. It's unprofitable and growing nearly 50% annually, so the company's value reflects future performance more heavily than most stocks. Relatively modest changes in performance and outlook can translate to huge swings in valuation ratios and the stock's price.
Now what
Zscaler is still down 50% from its 2021 high. The stock was crushed in 2022 thanks to rising interest rates and slowing economic growth, and those conditions haven't reversed quite enough to allow a full recovery. Even with its recent charge, Zscaler still lags the Nasdaq.
The stock's price-to-sales ratio (P/S) is around 13, and its forward price-to-earnings (P/E) ratio is over 70, both of which are high. That's almost certainly going to create extra volatility for the Zscaler shareholders, so investors should be aware of this before getting involved.
Zscaler still has fantastic long-term fundamental drivers as a leader in an important cybersecurity field. The company addresses evolving threats that will only get more prominent over time. While it's expensive, long-term investors still have an opportunity to generate exceptional returns with this stock if the company continues to execute for the next few years.
