Why Zscaler (ZS) Stock Is Down Today
What Happened:
Shares of cloud security platform Zscaler (NASDAQ:ZS) fell 17.8% in the pre-market session after the company reported second-quarter earnings results. Its billings guidance for next year was slightly below expectations, and furthermore, suggests an acceleration in growth throughout the year. Management specifically detailed "year-over-year billings growth of approximately 13% in the first half, accelerating to 23% growth in the second half". This made the market quite uncomfortable. On the other hand, Zscaler beat analysts' billings, revenue, and operating income expectations this quarter. Zooming out, we think this was a solid quarter featuring some areas of strength, but the outlook seems to be weighing on shares.
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What is the market telling us:
Zscaler’s shares are very volatile and over the last year have had 8 moves greater than 5%. But moves this big are very rare even for Zscaler and that is indicating to us that this news had a significant impact on the market’s perception of the business.
The biggest move we wrote about over the last year was 7 months ago, when the company dropped 15.5% as cybersecurity stocks fell after industry stalwart, Palo Alto Networks reported fourth-quarter results and lowered full-year guidance for revenue and billings, with both metrics also falling below Wall Street's expectations. This is never a good sign. Furthermore, billings and revenue guidance for next quarter also missed Wall Street's estimates, with EPS below as well.
Palo Alto Networks highlighted many challenges during the quarter, including 1.) Weakness in the U.S. federal vertical, which impacted billings and revenue growth, and 2) Customers' conservativeness regarding upfront cash payments. The long-term demand forecast provided was also concerning as management highlighted the possibility of "a period of 12 to 18 months of pressure on our top-line growth rates, notably billings."
In addition, the top-line growth metrics are expected to be impacted by the company's shift towards a "platformization" strategy, which will make it easier for customers to consolidate their usage of cybersecurity solutions and provide the possibility of accessing some products for free in the early adoption phase. Under this strategy, Palo Alto Networks noted that a typical customer adopting the platform " will not pay us for our technology for a period of time. As these programs ramp over the next year, we expect a change to our billings and revenue growth for the next 12 to 18 months." This strategy may drive more competition within the cybersecurity space as industry players adjust their pricing/product strategies to stay competitive.
Overall, this was a weaker quarter for Palo Alto Networks, with the poor guidance highlighting several issues within the business as well as potential challenges for cybersecurity players in the coming quarter.
Zscaler is down 25.3% since the beginning of the year, and at $158.67 per share it is trading 37.8% below its 52-week high of $254.93 from February 2024. Investors who bought $1,000 worth of Zscaler’s shares 5 years ago would now be looking at an investment worth $2,336.
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