Zscaler Earnings: Robust Sales Growth and Improved Profitability Underscore a Solid Quarter

Key Morningstar Metrics for Zscaler

• Fair Value Estimate: $213.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Zscaler’s Earnings

We have raised our fair value estimate for Zscaler ZS to $213 per share from $183, primarily due to a revised outlook for the firm’s long-term growth prospects. We expect vendor consolidation and artificial intelligence to drive greater demand for the company’s security solutions. Our increase is also supported by its solid financial results and better-than-expected guidance for both the upcoming quarter and the remainder of fiscal 2024.

We continue to be bullish on the overall opportunity before Zscaler, and view its solutions as uniquely poised to benefit as customers increasingly shift their architectures from on-premises to the cloud, creating tailwinds for the firm’s cloud-first security solutions. Like its security peers, Zscaler’s stock has seen a dramatic runup since its last earnings report. We believe the sharp drop since this new report adds credence to our belief that some of the expectations baked into that valuation were overly optimistic.

At the same time, we believe our prior forecast did not accurately value Zscaler’s long-term opportunity as a platform vendor that stands to benefit materially from increased vendor consolidation and AI-related security spending. We now view Zscaler as fairly valued, trading in the 3-star range.

Zscaler’s sales for the second quarter came in at $525 million, up 35% year over year and roughly $17 million over our above-consensus estimates. We are impressed by the firm’s continued ability to drive sales expansion by upselling existing clients as well as landing larger deals. Customers with an annual contract value of more than $100,000 and $1 million expanded by 21% and 31%, respectively.