Zscaler stock dives after weak guidance: Is the crash justified?

Zscaler stock price erased the gains made in the regular session after the company published strong results and a mild forward estimate. It initially rose by 3.35% on Tuesday to $290 and then retreated by over 7% to $266.90 in the extended hours. It settled to the lowest point in September. 

Zscaler’s reported strong results and mild guidance

Zscaler, one of the top companies in the cybersecurity industry, is doing well as the ongoing AI boom drives more demand for its services. Its annual revenue moved from over $673 million in 2021 to over $2.6 billion in the last financial year.

Most notably, the company has continued to narrow its losses in this period. It made a large net loss of $262 million in 2021 to $41 million in the last financial year. 

Its revenue growth continued in the first quarter of the year. Its revenue rose by 26% to $788 million, higher than its guidance of between $772 million and $774 million.

Additionally, the company’s operating profit was higher than its previous guidance. It made an operating profit of $172 million, higher than its guidance of between $166 million and $168 million.

The earnings per share of 96 cents was also higher than its guidance. Historically, Zscaler has always been a conservative company that avoids overpromising. 

More numbers showed that its annual recurring revenue (ARR) rate jumped to over $3.2 billion as companies continued to embrace its technology, especially in the AI security. Indeed, the number of companies paying over $1 million a year rose to 698 from 491 in the second quarter of last financial year.

Most importantly, the company has become more profitable, with the operating profit margin rising to 22% and its free cash flow rose to 52%.

The Zscaler stock price dropped as the management’s guidance, while strong, was lower than expected. It expects its revenue will be between $797 million and $799 million, representing a 23% growth rate.

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For the year, the company believes that its revenue will be between $3.28 billion and $3.3 billion, representing about 23% annual growth rate. The operating profit is expected to be between $172 million and $174 million.

There are chances that the company’s real number will be much higher than its guidance because of its history of outperformance. 

Is ZS valuation justified?

A key concern about Zscaler is that its business is relatively overvalued as its forward price-to-earnings ratio rose to 76, much higher than the sector median of 22. Its multiple is higher than other companies like Palo Alto Networks, Fortinet, and Snowflake.

This valuation metric is mostly because of its strong and consistent growth over the years and the fact that the company has now become profitable. 

Still, the company’s rule-of-40 metric points to the company being less overvalued. Its forward revenue growth is ~23%, while its operating profit and free cash flow margins are 22% and 26%, respectively. This gives it a rule-of-40 multiple of 45% and 49%, respectively. That is a sign that the company is not all that expensive.

Zscaler stock price analysis 

The daily timeframe chart shows that the Zscaler stock price peaked at $336 earlier this month and then tumbled to a low of $268. After rising to $290 on Monday, the stock tumbled to $266 after its earnings.

This crash happened as the company formed a double-top pattern at $317 and a neckline at $260. A double-top is one of the most popular bearish patterns.

Therefore, the stock will likely retreat, potentially to $250, and then resume the uptrend as investors start to buy the dip. Over time, the stock will likely retest the key resistance level at $317.

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