Why It’s Time to Start Buying Zscaler Stock

Scaler‘S (NASDAQ: ZS) shares fell sharply after the company released its earnings report for the fourth quarter of fiscal 2024 (ended July 31). While the company reported solid revenue growth and falling losses, lower-than-expected guidance for fiscal 2025 seemed to send investors running to the exits.

Indeed, a stock decline brings with it a much lower share price. The question for investors now is whether this lower price changes the investment thesis. Let’s take a closer look.

Zscaler Revenue

Zscaler released what looked like a solid report at first glance: fiscal fourth-quarter revenue of $593 million, up 30% from year-ago levels.

In addition, growth in cost of goods sold and operating expenses was lower than the growth in revenue. This growth reduced the quarterly GAAP net loss to $15 million, compared with a loss of $31 million in the year-ago quarter.

Still, investors typically frown on a slowdown in growth, and Zscaler was no exception. The company’s fiscal first-quarter 2025 guidance was $605 million at the midpoint, implying a much slower 22% revenue growth. Zscaler shares lost nearly 19% of their value in the following trading session on that news.

Current Status of Zscaler

Despite the significant slowdown, the report may need some perspective. A 30% revenue growth rate means revenue will double in about 2.4 years, according to the rule of 72. Such growth rates can be difficult to sustain over the long term, so the slowdown in revenue growth shouldn’t surprise investors.

What’s more, the $15 million quarterly loss puts Zscaler in the GAAP breakeven range. The company also generated $136 million in free cash flow in the quarter, so it’s in better financial shape than the losses might suggest. If it weren’t for the $528 million in stock-based compensation expenses, the company would likely be profitable by now.

In addition, the falling share price brings a more reasonable valuation. While the latest price-to-sales (P/S) ratio of 12 is not “cheap,” it is close to the all-time low for this stock, making it more likely that further declines will be limited.

Moreover, no one can deny that Zscaler has become a major player in the cybersecurity industry. Seeing that the traditional firewall is not working in the cloud computing industry, Zscaler invented zero-trust security.

Zero-trust assumes that every potential participant is an attacker, and users must show who they are through a series of attributes to gain a level of access based on their position in the organization. Its systems currently manage more than half a trillion transactions per day.

Moreover, even if revenue growth slows, Zscaler will likely remain a fast-growing company for years to come. Fortune Business Insights projects that the cybersecurity industry will see a compound annual growth rate of 14% through 2032.

What’s more, Zscaler found that ransomware attacks increased by 18% between April 2023 and April 2024. These are good signs for the company, considering the numerous competitors Zscaler faces in its industry.

Should I buy Zscaler?

Given the state of Zscaler, investors should consider buying shares of the company at current prices.

Undoubtedly, September and October are traditionally tough months for the market. Additionally, the market tends to punish stocks when growth slows, even if it is pulling back from unsustainable levels. Knowing this, investors may want to wait until November to buy, or at least buy stocks more slowly, through dollar-cost averaging.

Nevertheless, Zscaler’s rapid growth is expected to continue, even if at a slightly slower rate. What’s more, the P/S ratio is near a record low, making it more likely that it will find a bottom near current levels. Such factors suggest that Zscaler stock is currently trading at an attractive level for potential buyers.

Is it worth investing $1000 in Zscaler now?

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Will Healy has positions at Zscaler. The Motley Fool has positions at and recommends Zscaler. The Motley Fool has a disclosure policy.

Why It’s Time to Start Buying Zscaler Stock was originally published by The Motley Fool