On Friday, Cantor Fitzgerald adjusted its price target on Zscaler (NASDAQ:ZS), a prominent cloud-based security company, reducing it to $200 from the previous $230, while maintaining a Neutral rating on the stock.
This adjustment comes in response to a comprehensive evaluation of Zscaler's third-quarter fiscal year 2024 performance, which surpassed expectations on several financial metrics.
Zscaler reported a 3.2% revenue beat, a 7.6% increase in billings, a 21.8% rise in operating income, and a significant 59.9% boost in free cash flow compared to FactSet consensus estimates. The company's billings grew by 30.2% year-over-year to $628 million, which was notably higher than the anticipated 21% growth to $584 million. This outperformance led to a 15% surge in Zscaler's stock price in after-hours trading on May 30, contrasting with a 0.60% decline in the S&P 500.
The firm's F3Q24 results were robust, with revenue climbing 32.1% year-over-year to $553 million, comfortably exceeding the consensus estimate of $536 million. Additionally, Zscaler's free cash flow was impressive at $123 million, indicating a free cash flow margin of 22.3% against a consensus of $77 million.
The company's financial health was further underscored by its raised FY2024 billings guidance, now estimated to be between $2.603 and $2.606 billion, which represents a 28% year-over-year growth at the midpoint.
The financial outcomes of Zscaler's third-quarter performance also satisfied the Rule of 40, which is a benchmark for the software industry where a company's combined revenue growth and free cash flow margin should exceed 40%. Zscaler's combined metric, referred to as the Rule of 54% in this case, consisted of 32.1% revenue growth and a 22.3% free cash flow margin.
Despite the positive results and the subsequent increase in the company's stock price, Cantor Fitzgerald's new price target reflects a recalibration to align with the average trading multiple of Zscaler's peers. The analysis by Cantor Fitzgerald indicates a conservative stance, acknowledging Zscaler's solid quarterly performance while also adjusting expectations based on broader market comparisons.
InvestingPro Insights
Zscaler's impressive quarterly performance has caught the attention of investors and analysts alike. According to InvestingPro data, the company boasts a robust gross profit margin of 77.55% for the last twelve months as of Q2 2024, highlighting its efficiency in generating revenue relative to costs. Despite a challenging period that saw the stock price fall significantly over the last three months by 35.26%, Zscaler holds more cash than debt on its balance sheet, suggesting a strong financial position to weather market volatility.
InvestingPro Tips indicate that Zscaler is expected to see net income growth this year, with analysts predicting profitability. This aligns with the company's reported revenue growth of 40.62% for the last twelve months as of Q2 2024, outpacing many competitors. Moreover, the company's stock is currently trading in oversold territory according to the Relative Strength Index (RSI), which could signal a potential buying opportunity for investors.
For those looking to delve deeper into Zscaler's financials and future prospects, InvestingPro offers additional insights and tips. Readers can use the exclusive coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 14 additional InvestingPro Tips available, investors can gain a comprehensive understanding of Zscaler's market position and make informed decisions.
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