Zscaler, Inc. (ZS) Is a Trending Stock: Facts to Know Before Betting on It

Zscaler (ZS) shares have declined 4.7% over the past month, underperforming the S&P 500 but outperforming its security industry peers, and currently holds a Zacks Rank #3 (Hold), suggesting near-term performance in line with the broader market. Despite consistently beating revenue and EPS estimates in the last four quarters, the cloud security provider faces a projected slight decline in current fiscal year EPS, though revenue growth remains robust at over 19% and next fiscal year EPS is forecast to grow 12%. Investors should note its Zacks Value Style Score of 'F', indicating it trades at a premium to its peers.

Analysis

Zscaler (ZS) presents a mixed financial profile, characterized by robust revenue growth clashing with near-term earnings pressure and a premium valuation. The company's stock has underperformed the S&P 500 with a 4.7% decline in the past month, yet it has outperformed its specific industry, which fell 8.7%. Fundamentally, Zscaler continues its trend of strong execution, having beaten consensus revenue and EPS estimates for the past four consecutive quarters, with the last report showing a 22.6% year-over-year revenue increase. This top-line strength is expected to continue, with consensus forecasts pointing to revenue growth of 19.1% for the current quarter and over 19% for the next two fiscal years. However, this growth is not currently translating to the bottom line, as current quarter EPS is projected to decline 9.1% year-over-year, and the full fiscal year EPS is expected to be nearly flat with a 0.3% decrease. Analyst estimates have remained stable over the last 30 days, leading to a Zacks Rank #3 (Hold), but a key concern is the stock's valuation, which is graded 'F' for value, indicating it trades at a significant premium to its peers.

Key Decisions for Investors

• Given the conflicting signals of strong revenue growth against a temporary earnings contraction and a premium valuation, a neutral or 'Hold' stance appears prudent, aligning with the Zacks Rank #3.
• Investors should be cautious of the 'F' grade for value, which signifies a high valuation that could pose a risk if the company fails to meet its robust growth forecasts or if market sentiment sours on high-multiple growth stocks.
• The primary focus should be on the company's ability to convert its consistent 20%+ revenue growth into renewed bottom-line acceleration; the next earnings report will be critical for validating the forecast of 12% EPS growth for the next fiscal year.