On Wednesday, Wells Fargo (NYSE:WFC) adjusted its outlook on Zscaler (NASDAQ:ZS) stock, reducing the price target to $180 from $182 while maintaining an Equal Weight rating. The adjustment comes after Zscaler's stock experienced a 15% decline in after-market trading, despite reporting fourth-quarter results for fiscal year 2024 that surpassed expectations.
The company's guidance for billings in fiscal year 2025, however, was slightly below analyst forecasts and displayed a heavy reliance on performance in the latter half of the year.
Zscaler's fourth-quarter performance beat guidance across all metrics, but the growth in billings was less pronounced both sequentially and year-over-year. Management at Zscaler has indicated a considerable slowdown in billings growth for the first half of fiscal year 2025, projecting a year-over-year increase of just 13%.
This slowdown is attributed to diminished growth from previously contracted billings and reduced productivity stemming from staff attrition and re-hiring efforts.
Despite the anticipated deceleration in billings growth, Zscaler's management expects a rebound in the second half of the fiscal year, with billings growth projected to accelerate to 23%. This optimistic outlook is contingent upon an improvement in productivity, which the company acknowledges involves certain risks.
The Wells Fargo analyst's commentary highlighted the significant deceleration in billings growth as a reason for maintaining the Equal Weight rating. With the revised price target of $180, the firm values Zscaler at 9.2 times its expected enterprise value to calendar year 2025 sales. This valuation reflects the cautious stance taken due to the potential challenges in achieving the forecasted ramp-up in productivity and subsequent billings growth.
In other recent news, Zscaler has been at the center of several analysts' assessments following its fiscal fourth-quarter earnings report. The company outperformed expectations with a 27% year-over-year billings growth and surpassed a significant milestone by achieving over $2.5 billion in Annual Recurring Revenue (ARR). However, its first half fiscal year 2025 guidance, projecting a 13% growth, has raised concerns among investors.
Analysts from multiple firms have adjusted their price targets for Zscaler. Jefferies reduced its target to $225, while maintaining a Buy rating, and JPMorgan (NYSE:JPM) cut its target to $220, yet maintained an Overweight rating. BTIG also reduced its target to $205 but kept a Buy rating on the stock. Guggenheim maintained a Neutral rating, expecting a revenue beat for the company's fourth quarter.
Despite a projected slowdown in billings growth for the first half of FY2025, analysts from these firms expressed confidence in Zscaler's long-term market position and growth potential. They cited the company's history of conservative guidance and its tendency to outperform initial billings projections.
The company's recent collaborations with Google (NASDAQ:GOOGL) and NVIDIA (NASDAQ:NVDA) to enhance security measures and integrate advanced AI technologies were also noted. These are the recent developments in Zscaler's financial performance and market position.
InvestingPro Insights
As Zscaler navigates through a period of deceleration in billings growth, the latest data from InvestingPro provides a broader perspective on the company's financial health and market performance. With a market capitalization of $29.2 billion, Zscaler is trading at a high Price / Book multiple of 26.71, which indicates a premium valuation compared to its book value. Despite not being profitable over the last twelve months, analysts expect a turnaround with net income predicted to grow this year. This aligns with the company's impressive gross profit margin of 77.94%, suggesting that Zscaler has a strong underlying business model with the potential to translate sales into profits more effectively in the near future.
The company's revenue growth remains robust, with a 37.16% increase over the last twelve months as of Q3 2024, and analysts anticipate sales growth in the current year. This is a positive signal for investors looking for companies with strong top-line momentum. Moreover, Zscaler's liquid assets exceed short-term obligations, indicating a solid liquidity position to meet immediate financial responsibilities.
For investors seeking more in-depth analysis, there are additional InvestingPro Tips available, providing a comprehensive view of Zscaler's financial metrics and market performance. These tips can help investors make more informed decisions by considering factors such as the company's debt levels, valuation multiples, and profitability forecasts.
For further insights and additional InvestingPro Tips on Zscaler, interested readers can visit https://www.investing.com/pro/ZS.
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