Wall Street doesn't always get things right, but it can be useful to pay attention when analysts reach a consensus on a particular stock. Sometimes, it can suggest potential upside on the horizon.
The majority of the analysts tracked by The Wall Street Journal have given shares of Zscaler (ZS +3.10%) and Confluent (CFLT +0.00%) the highest possible buy rating, with none recommending selling.
Shares of Zscaler and Confluent are trading 54% and 79% below their all-time highs, respectively, which were set during the tech frenzy in 2021. Both companies were heavily overvalued back then, but the dip in their stock prices combined with their continued revenue growth makes them look like attractive buys today.
Both companies are poised to succeed in a world dominated by artificial intelligence (AI), so here's why investors might want to follow Wall Street's lead.
Image source: Getty Images.
1. Zscaler
Modern organizations rely heavily on technologies like cloud computing to run their operations online. Cloud computing allows them to seamlessly reach a global customer base and hire from a global talent pool, but it also makes them vulnerable to attackers who can strike at any time and from any place. Zscaler's Zero Trust Exchange uses AI to keep those malicious actors at bay.
To protect cloud networks, Zscaler's technology treats every sign-on attempt as hostile. It analyzes an employee's login credentials, device, and location to confirm it's really that person trying to gain access, which is especially useful for organizations with a lot of staff working remotely. Thanks to AI, that entire process happens in a matter of seconds.
The Zero Trust Exchange goes a step further. It connects each employee only to the cloud applications they require to complete their jobs, so even if hackers bypass the identity security layer, they can't access the organization's entire network or compromise other valuable assets.
NASDAQ: ZS
Key Data Points
Zscaler continues to launch new tools under its AI Analytics banner, like Risk360, which can analyze 100 factors within a company's digital environment to determine its vulnerability to online threats. It helps the company understand its potential financial loss in the event of a successful attack and what its top risk drivers are. Despite most AI Analytics products being less than a year old, they are already driving growth in upsells for the company.
Zscaler generated $2.167 billion in revenue during fiscal 2024 (ended July 31), a 34% increase from fiscal 2023. It was also above management's guidance ($2.141 billion at the midpoint), which it raised three times throughout the year. The company values its addressable market at $96 billion, so its current revenue suggests it still has a long runway for growth.
Zscaler's price-to-sales (P/S) ratio topped 70 when its stock peaked in 2021, which was unquestionably expensive. The 54% decline in its stock price combined with its solid revenue growth since then have pushed its P/S ratio down to 11.8 as of this writing, which is actually a discount to other AI cybersecurity providers like CrowdStrike (19.8) and Palo Alto Networks (14.9).
Plus The Wall Street Journal tracks 42 analysts covering Zscaler stock, and 25 have given it the highest possible buy rating. Four more are in the overweight (bullish) camp, and 13 recommend holding. No analysts recommend selling. Based on Zscaler's growth, its addressable market, and its valuation, it might be a good idea to follow the Street's lead.
2. Confluent
Data streaming is the technology that facilitates most of our real-time digital experiences. It powers the live data feed on our stock trading platforms and it allows online stores to give us accurate inventory information so we know whether or not a product is actually in stock.
Confluent serves over 5,440 customers, including giants like Walmart, Citigroup, Domino's Pizza, BMW Group, and more. Helping those companies deliver real-time experiences to their customers could be a $60 billion opportunity for Confluent, but the rise of AI is creating an entirely new market for the data streaming provider.
That's because the quality of an AI application depends on its ability to ingest, process, and interpret data in real time so it can provide an accurate response when prompted by its user. That's why developers are turning to Confluent to build data pipelines at scale -- and according to a survey by the company, 90% of IT specialists think data streaming will drive innovation across the AI industry.
NASDAQ: CFLT
Key Data Points
Here's an example. A chatbot like ChatGPT might be able to tell you how much it costs to bring a surfboard on a plane, because that information is probably available on the internet. However, it can't give you information specific to your situation, like whether your flight is delayed. An airline could use Confluent to refine its data, create data pipelines, and stream information directly to an AI-powered chatbot on its website, which would allow the application to provide such information.
Use cases like that could save companies incalculable amounts of money over the long term, because they reduce the need for human workers while providing customers with much faster service. That's going to drive demand for Confluent's data-streaming platform.
Confluent's trailing-12-month revenue of $865 million is a drop in the bucket compared to its $60 billion addressable market, let alone what the AI industry will add to that figure over time. As was the case with Zscaler, Confluent stock was expensive when its P/S ratio hit 60 during the tech frenzy in 2021. However, it's now trading at a P/S ratio of just 7.1, near its lowest since the company came public in that same year.
The Wall Street Journal tracks 32 analysts covering Confluent stock, and 20 have given it the highest possible buy rating. Four more are in the overweight (bullish) camp, and seven recommend holding. Although one analyst has given the stock an underweight (bearish) rating, none recommend selling. Their consensus price target of $29.76 implies an upside of 51% from where the stock trades today, so taking a position could be very worthwhile for investors.
