By Michael Elkins
Morgan Stanley reiterated an Equal Weight rating and $120.00 price target on Zscaler, Inc. (NASDAQ:ZS) ahead of the cloud security company's 2Q earnings release.
Morgan Stanley performed checks on the company that came back largely stable. However, MS analysts think that the bar is higher for Zscaler heading into its FQ2 print as demand for network security appears to be better than feared so far in CY23.
The analysts wrote in a note, "Our checks for Zscaler were largely in line to slightly positive this quarter, as the demand environment for network security and initiatives around SASE (Secure Access Service Edge) remain stable, despite longer sales cycles. While competitive dynamics are more challenging, our checks didn't indicate any meaningful change in win rates. However, with stronger-than-expected results last week from competitor Palo Alto Networks, which reported +50% ARR growth in its SASE business (now ~$900MM ARR), we think the bar for Zscaler is likely higher, as both vendors are nearly adding the same amount of net new SASE business each year."
For FQ2 billings, Morgan Stanley expects a beat well below historical average of 16%, but above last quarter's ~2%. The analysts expect FY23 billings guidance to be raised by the magnitude of the FQ2 beat at least, up from the current +30-31% YoY growth range. On bottom line, they expect a modest raise in FY23 op margin outlook and 20% FY23 FCF margin guide to be reiterated.
ZS is expected to report 2Q23 earnings on March 2nd.
Shares of ZS are down 0.40% in early trading on Tuesday.