Cybersecurity stock Zscaler (ZS 0.47%) enjoyed quite the run-up over the past year. Shares were at a 52-week low of $131.59 last August before nearly doubling to a high of $259.61 in February.
Since then, the stock has pulled back, although it remains well above its 52-week low. As a matter of fact, Zscaler shares were heading downward in the days leading to the company's earnings report for its fiscal third quarter, ended April 30.
But after the report was released on May 30, the stock price reversed course and began climbing. If you missed this recent dip, is it now too late to buy Zscaler stock? Let's dig into the company to arrive at an answer.
NASDAQ: ZS
Key Data Points
Zscaler's impressive performance
Zscaler shares got a boost from the firm's excellent fiscal Q3 earnings results. Revenue reached $553.2 million, which represented a 32% year-over-year increase.
This result extended the company's streak of double-digit year-over-year sales growth over the past several quarters.
| Fiscal Quarter | Revenue | YOY Change |
|---|---|---|
| Q3 2024 | $553.2 million | 32% |
| Q2 2024 | $525.0 million | 35% |
| Q1 2024 | $496.7 million | 40% |
| Q4 2023 | $455.0 million | 43% |
Data source: Zscaler. YOY = year-over-year.
Zscaler expects fiscal Q4 to continue the trend with sales of at least $565 million.
But there's more good news. The company achieved strong free cash flow (FCF) growth in fiscal Q3. Zscaler exited the quarter with $123.1 million in FCF, a substantial increase over the prior year's $73.9 million.
Moreover, Zscaler's balance sheet was excellent. Its Q3 assets totaled $4.2 billion, with a whopping $2.2 billion of that in cash, cash equivalents, and short-term investments. Total liabilities were $3.1 billion, but $1.6 billion of that represents deferred revenue, which will eventually be recognized as earnings.
Yet perhaps the most significant news was the company's Q3 net income of $19.1 million. This marked the first profitable quarter for Zscaler. The shift into profitability was perfect timing, since the firm's rate of year-over-year revenue growth has been slowing down for the past year.
How Zscaler outmaneuvers competitors
Zscaler's success is impressive considering that it battles plenty of prominent cybersecurity rivals, such as Palo Alto Networks and CrowdStrike, for customers. In this crowded cybersecurity arena, Zscaler stands out for its zero-trust software platform.
The zero-trust designation means the company's cyberattack protection assumes everyone on a corporate computer network is a potential threat, even employees. This approach makes sense since many hacks happen because an employee was tricked into giving criminals an opening, such as downloading an email attachment with a virus.
Zscaler strikes a delicate balance between safeguarding corporate networks, and ensuring cybersecurity doesn't hinder employees from completing their work.
For example, Zscaler does not use virtual private networks (VPNs), a popular cybersecurity mechanism, because VPNs can stifle a remote employee's ability to quickly access a corporation's online tools.
Compared to older, monolithic cybersecurity platforms from some of its competitors, Zscaler's approach is well-adapted to the ways in which businesses execute work today.
CEO Jay Chaudhry summarized this idea recently: "The last three decades of the security industry have been centered around firewalls, which are no longer effective in today's cloud, mobile, and AI world."
To buy or not to buy Zscaler stock
Zscaler's success in growing revenue validates the company's cybersecurity approach. In fact, the U.S. Department of Defense signed a deal with Zscaler worth seven figures in Q3.
The firm isn't resting on its laurels, however.
Zscaler is expanding its suite of artificial intelligence services to strengthen its security offerings. For example, the company acquired Avalor Technologies in March for its security data fabric, which unifies disparate data sources in a customer's business systems. This strengthens the ability of Zscaler's AI to provide actionable insights about threats in real time.
The company's ongoing revenue growth, solid financial management, and strong product suite are a combination that should enable Zscaler's shares to increase in value over time. Indeed, the consensus among Wall Street analysts is an overweight rating with a median share price of $225 for Zscaler stock.
Even if you missed the recent share price drop, Zscaler looks poised to build on its outstanding Q3 performance. This makes Zscaler shares a worthwhile long-term investment.
