Zscaler Rises 18% in a Month: Should You Buy, Sell or Hold the Stock?
Zscaler, Inc. ZS stock has climbed 18.2% in the past month, outperforming the Zacks Security industry's return of 14.8%. With Zscaler's massive rise in the past month, investors now face a key decision: Should they hold on to the stock or book profit?
Zscaler One Month Performance Chart
Rising Traction in Cybersecurity Aids Zscaler
The demand for Zscaler's cybersecurity solutions remains strong, driven by the rising threats of nation-state cyber warfare, ransomware extortion and rising malware attacks. Moreover, as organizations shift from traditional network security to cloud-based platforms, ZS' cloud-native platform is gaining customers by offering a more agile and scalable zero-trust security model.
In the second quarter of fiscal 2025, ZS attained a 12-month trailing dollar-based retention rate of 115%, driven by larger bundle sales and robust upsells. Remaining Performance Obligations that represent committed, non-cancelable future revenues were boosted by 28% year over year. By the end of the quarter, ZS had 620 customers with annualized recurring revenues (ARR) surpassing $1 million, while its customer count for ARR above $100,000 hit 3,291.
Moreover, Zscaler is rapidly enhancing its GovCloud solutions to receive approvals from the governing bodies. ZS is expanding its presence among government agencies through compliance with government security standards. Zscaler has enabled numerous government agencies to utilize AI-powered Cloud Browser Isolation and IPv6 for secure connectivity, mainstreaming its GovCloud solution among its federal clients.
Zscaler's government-focused offerings enabled it to add one cabinet-level agency client in the fourth quarter, bringing its total to 13 out of 15 U.S. cabinet-level agencies. As more government agencies use Zscaler's products, the company's presence in the public sector could expand, providing a stable growth stream.
ZS Enhances Cybersecurity Offerings With AI Deployment
Zscaler is also implementing generative AI in its offerings to capitalize on this new growth opportunity. ZS has collaborated with NVIDIA NVDA and CrowdStrike CRWD to integrate their AI expertise.
ZS strengthened its Zero Trust Security model by integrating NVIDIA's AI technologies, including NVIDIA NIM inference microservices, NeMo Guardrails and Morpheus framework. Zscaler collaborated with CrowdStrike to harness CRWD's AI expertise in SIEM, threat intelligence, cyber risk quantification and real-time insights.
With a rich partner base and strong indicators of robust demand for cybersecurity products, ZS is improving its top line. The Zacks Consensus Estimate for fiscal 2025 revenues suggests a 22.2% year-over-year increase.
Zscaler Faces Competitive Pressure
Zscaler operates in a highly competitive cybersecurity market, which compels it to invest heavily in broadening its capabilities. Over the past few years, Zscaler has invested heavily to enhance its sales and marketing (S&M) capabilities, particularly by increasing the sales force.
ZS' non-GAAP S&M expenses increased 12.9% year over year to $237.5 million in the second quarter of fiscal 2025. The S&M expenses also accounted for 36.7% of second-quarter fiscal 2025 revenues, indicating aggressive go-to-market efforts.
Additionally, investment in research & development (R&D) is a top priority for Zscaler. Over the last couple of years, the company has almost doubled its R&D expenses to improve the design, architecture, operation and quality of its cloud platform. In the second quarter of fiscal 2025, R&D expenses soared 34.7% year over year to $105 million and accounted for 16.2% of total revenues.
We opine that rising S&M and R&D expenses might weigh on the company's bottom-line results. The consensus mark for Zscaler's fiscal 2025 EPS has been revised downward by a penny to $3.06 in the past seven days, reflecting analysts' pessimism about its earnings capacity. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)
Overvaluation: A Concern for ZS Stock
Zscaler holds a premium valuation, reflected in its Zacks Value Score of F. This is further reinforced by its Forward 12-month P/S ratio of 11.56X, significantly exceeding the Zacks Computer and Technology sector's average of 5.71X.
Zscaler Forward Twelve Month (P/S) Chart
Conclusion: Hold ZS Stock for Now
Despite its premium valuation, Zscaler's AI-based innovations and its strong position in the Zero Trust security space make it a stock worth retaining. Zscaler carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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