Loop Capital has adjusted its outlook on Zscaler (NASDAQ: NASDAQ:ZS), a leading company in cloud security, by reducing its price target to $165 from the previous $180.
The firm has chosen to maintain a Hold rating on the stock. The revision comes as Zscaler faces similar macroeconomic challenges as its peers, in addition to significant alterations in its sales processes. Despite these issues, the company has been acknowledged for its continued strong execution.
Zscaler concluded the fiscal year with its lowest year-over-year billings growth rate, reaching 27%, and provided a cautious forecast for fiscal year 2025 billings, particularly for the first half of the year.
The company has a track record of setting conservative billings growth targets at the start of a new fiscal year. However, concerns arise that investors might not have the patience to wait until the second half of the year to evaluate the company's progress in overhauling its sales organization and market approach, which is increasingly reliant on upselling to its existing customer base.
The company's product expansion strategy and the adoption of new products within its existing customer base are seen as increasingly vital. For the past year, emerging products represented 22% of Zscaler's new annual contract value (ACV), a rise from 18%, with expectations to increase to mid-20s percentages in fiscal year 2025.
Despite Zscaler's solid performance in the recent quarter, Loop Capital expresses caution due to the ongoing transition in sales leadership and the shift towards a more account-centric sales model, which presents substantial execution risks.
This risk is further heightened by the company's dependence on securing large deals, particularly with new clients, which account for roughly one-third of its new ACV.
Loop Capital's revised price target also reflects a more conservative cash flow forecast for the outer years, specifically beyond fiscal year 2027. Following the update from Loop Capital, Zscaler's shares experienced a downturn, dropping approximately 15% to $165 in after-hours trading.
The firm concludes that while Zscaler is becoming the industry standard for zero-trust security architecture among large organizations, it is preferable to wait until the company has navigated through the current risks before reassessing its position. This perspective is reinforced by recent findings that suggest a deceleration in growth for Zscaler's core products, particularly in renewals.
In other recent news, Zscaler, a leader in cloud security, has had its price target adjusted by several investment firms following robust financial results for the fourth fiscal quarter. Zscaler's billings grew by 27% year-over-year to $910.8 million, surpassing consensus estimates by $18 million or 2%.
Additionally, the company's revenue saw a 30% increase to $592.9 million, beating expectations by 4.5%. Despite these strong results, Zscaler's initial fiscal year 2025 billings guidance indicated a heavier weighting towards the second half of the year, prompting firms such as Needham, Scotiabank, Baird, Rosenblatt, Mizuho Securities, and Cantor Fitzgerald to adjust their price targets.
InvestingPro Insights
As Zscaler (NASDAQ:ZS) navigates through a challenging macroeconomic landscape and transitions in its sales strategy, the latest data from InvestingPro provides further context to the company's financial health and market performance. With a market capitalization of $29.2 billion, Zscaler has been trading at a high Price / Book multiple of 26.71, reflecting its premium valuation in the market. Despite the absence of profitability in the last twelve months, analysts are optimistic about Zscaler's future, expecting net income growth and predicting the company will become profitable this year. This outlook is supported by an impressive gross profit margin of 77.94% and a robust year-over-year revenue growth of 37.16%.
InvestingPro Tips indicate that Zscaler's liquid assets exceed its short-term obligations, providing the company with a stable financial cushion to manage its moderate level of debt. Moreover, the company has shown a strong return over the last month, with a 13.96% increase in its stock price. These indicators suggest that while Zscaler is trading at high valuation multiples, its financials and recent performance may offer grounds for investor confidence. For those interested in a deeper dive into Zscaler's metrics and potential, InvestingPro offers additional tips and insights at https://www.investing.com/pro/ZS.
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