Zscaler Shares (NASDAQ: ZS) Flip The Script, Up With Surprise Profits

In what will be a welcome shift of momentum for holders of Zscaler stock (NASDAQ: ZS), the company flipped the script on what had been a negative start to 2024 for the share price, and delivered impressive earnings. The surprise beat saw the stock price gap up 17% on the open, before tailing off somewhat through the day so far. Despite the pullback, a current upswing a little over 5% will be well received with prices down 22% YTD.

Zscaler are a leading company in cloud security, and the surprise profit in third-quarter results go against the grain in what has been a challenging time for the sector, underscoring the company's growth trajectory and financial strength.

In terms of revenue, Zscaler continued the upward climb, achieving $553.2 million for the quarter. This represents a 32% year-over-year increase and exceeds analysts’ expectations which were pegged at $539 million. This robust growth underscores the increasing demand for Zscaler’s services amid an evolving digital landscape that prioritizes cloud security.

Earnings per share (EPS) also beat firmly, with $0.88 against a consensus of $0.65. The FY outlook on EPS was also set at a range of $2.99 – $3.01, up from the expected $2.76. Markets do love an earnings beat, but out an outlook upside can cause significant shifts.

Looking forward to the fourth quarter, Zscaler has guided revenue to be in the range of $565 million to $567 million, which indicates a nearly 25% increase from the figures reported in the same period last year. These expectations are closely aligned with analysts' projections of $567.6 million, suggesting confidence in the company's ability to meet market expectations.

The significant response from markets following the profit announcement can be seen as a testament to the resilience and strategic direction of Zscaler, even as the cybersecurity industry traverses a rough patch. On what is a rough day for tech stocks so far, with the Nasdaq 100 down 1.54%, and the Composite 1.34% in the red; growth for ZS will be welcome. Industry competitors such as Crowdstrike (NASDAQ: CRWD) trade down 2%, as Fortinet (-0.36%) and Palo Alto Networks (-1.86%) also face declines on the day.

Of the analysts covering the stock, the difference in opinion has been rather marked, with four of the firms raising their price target, and sever reducing their own forecasts. This does not tell the full story however, as one of those to reduce PTs, Bernstein did so from a position of heavy confidence. Dropping the ZS forecast from $280 to $270 whilst keeping an Outperform rating indicates an upside potential of more than 60% above today's price. Comments surrounding the slowly degrading NRR meant there are ‘some thorns on the rose', despite their being ‘much to like'.

It remains to be seen how Zscaler will perform in the forthcoming quarters, but for now, the unexpected profit has injected a dose of optimism into both the outlook and shareholder sentiment.