Zscaler Earnings: Weak Outlook for Fiscal 2025 Doesn’t Diminish Our Long-Term View

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 maintain our fair value estimate of $213 per share for Zscaler ZS after the firm closed fiscal 2024 with robust financial results offset by weaker-than-expected top-line guidance for fiscal 2025. As in previous quarters, we continue to be impressed by Zscaler’s strong execution in its emerging products category, which offers a new leg of top-line growth over the medium term. In a fragmented security market, we believe large vendors like Zscaler have a great consolidation opportunity ahead as customers increasingly turn to multisolution vendors at the expense of point-solution providers.

The firm’s shares dropped sharply after hours, as investors were likely left disappointed by its initial guidance for fiscal 2025. We view this adverse reaction as unwarranted. Management previously told investors that fiscal 2025 would start weak due to changes in the firm’s sales organization, with an uptick in sales personnel churn in the third quarter. Over the last few years, Zscaler has shown it can execute strongly, and we expect weakness in the first half of fiscal 2025 to be transient as the firm refocuses on its go-to-market strategy. Additionally, we believe a near-term bump shouldn’t deter investors from watching Zscaler’s attractive long-term growth and profitability opportunities.

Overall, we view the company as undervalued and see shares trading at an attractive price for long-term investors seeking high-quality cybersecurity exposure at a discount. Zscaler’s sales for the fourth quarter were $593 million, up 30% year over year and well ahead of our above-consensus $573 million estimate. The firm’s ability to steadily move upmarket continues to spearhead sales expansion, with customer accounts with an annual contract value of more than $100,000 and $1 million growing 19% and 26%, respectively.