Where Will Zscaler Stock Be in 1 Year?

Zscaler (ZS 1.28%) posted its latest earnings report after the market close on Sept. 5. For the fourth quarter of fiscal 2023, which ended on July 31, the cloud-based cybersecurity company's revenue rose 43% year over year to $455 million and surpassed analysts' expectations by $24 million. Its adjusted net income jumped 177% to $101 million, or $0.64 per share, which also cleared the consensus forecast by $0.15.

Those growth rates were impressive, but Zscaler's stock dipped 3% the following day. Over the past 12 months, its shares have only risen 9% as the Nasdaq rallied 20%. Can this hypergrowth stock regain its mojo over the next 12 months?

Image source: Getty Images.

What happened to Zscaler over the past year?

Zscaler specializes in "zero trust" services, which treat everyone -- including a company's CEO -- as a potential threat. But unlike traditional cybersecurity companies, which often install on-site appliances to run their services, Zscaler only provides its tools as cloud-native services, which are cheaper and easier to scale as a company grows.

From fiscal 2017 to fiscal 2022 (which ended last July), Zscaler's calculated billings soared at a compound annual growth rate (CAGR) of 57% as its revenue rose at a CAGR of 54%. But over the past year, its top-line growth gradually cooled off.

Data source: Zscaler. YOY = Year-over-year.

Zscaler mainly attributed that slowdown to the macro headwinds, which drove many companies to rein in their software spending. It expects that deceleration to persist with 33% year-over-year revenue growth in the first quarter of fiscal 2024.

During the conference call, CEO Jay Chaudhry said: "While the macro environment remains challenging, we are executing well." Looking further ahead, CFO Remo Canessa said the company would continue to balance its "business optimism and confidence in our improved execution with ongoing macroeconomic uncertainties."

What will happen to Zscaler over the next 12 months?

For fiscal 2024, Zscaler expects its revenue to rise 27% to 28% and for its billings to grow 24% to 26%. That would represent a significant slowdown from its 43% revenue growth and 37% billings growth in fiscal 2023.

It would also be growing at a slower clip than its cloud-native peer CrowdStrike (CRWD 2.03%), which expects to generate 35% to 36% revenue growth in fiscal 2024 (which ends next January).

On the bright side, Zscaler's adjusted gross margin stayed flat year over year at 81% in fiscal 2023 as its adjusted operating margin expanded from 10% to 15%. That expansion implies it still has plenty of pricing power in its growing niche market, and its recent cost-cutting measures (including layoffs for 3% of its employees earlier this year) are lifting its profits.

Zscaler expects to generate adjusted operating margins of about 15% in the first quarter of fiscal 2024 and 14% for the full year. It expects its adjusted earnings per share (EPS) to grow 66% to 69% year over year in Q1, and 23% to 26% for the full year.

Those bottom-line growth rates are impressive, but Zscaler's stock already trades at 78 times forward earnings and 11 times this year's sales. For reference, CrowdStrike -- which aims to grow its adjusted EPS by 82% to 84% this year -- trades at 64 times forward earnings and 12 times this year's sales. In other words, Zscaler's high valuations and unfavorable comparisons to its industry peers could limit its upside potential in this challenging market. 

Where will Zscaler's stock be in a year?

Zscaler is still a great growth stock, but its rich valuations could prevent it from outperforming the market over the next 12 months. So for now, I think investors should stick with more reasonably valued cybersecurity growth plays like CrowdStrike, Palo Alto Networks, and Fortinet -- then revisit Zscaler once its stock gets cheaper or its top-line growth accelerates again.