Zscaler Inc (NASDAQ: ZS), a leading player in the cybersecurity sector with a market cap of $32 billion and headquartered in California, has had quite a rollercoaster year in 2023. Despite a strong rally early in the year, its momentum faded by February, leading to a summer slump that saw the stock drop 40%. Nevertheless, Zscaler’s shares have been bouncing back.
They’ve consolidated in recent months and are now breaking out of their range, logging an impressive 30% gain since September. With earnings just around the corner, Zscaler looks poised to keep rallying into this highly anticipated release, and both analysts and investors are right to be excited. Let’s jump in and see why.
Fundamental Performance
For starters, let’s look at the company’s fundamental performance. Zscaler’s solid track record of growth might seem at odds with the stock’s mixed performance this year, especially given how the benchmark S&P 500 index has been hitting multiple all-time highs. Nonetheless, Zscaler has been delivering record revenue for consecutive quarters while maintaining a 30% year-over-year growth rate. The company smashed expectations with its latest earnings report, which included its second-best GAAP EPS ever print.
Meanwhile, as the Fed shifts to a more dovish stance and begins cutting interest rates, there’s a strong risk-on sentiment embedding itself across equities right now. For those of us on the sidelines, this macro environment should lend itself to increased interest in stocks like Zscaler, which is in the high-growth cybersecurity sector.
Bullish Analyst Updates
Building on the bullish fundamental performance are the recent analyst updates, such as that from the team over at JMP Securities who just reiterated their Outperform rating on the stock. This adds to similarly bullish stances from the likes of Citigroup in October and Susquehanna in September.
JMP’s price target of $270 for Zscaler is a street-high and implies a potential upside of nearly 30% from where the stock closed on Wednesday. Given that Zscaler stock has already climbed more than 30% since September, analysts are clearly optimistic heading into next month’s earnings.
Investors should be looking at further gains heading into the rest of the year, especially if earnings deliver another upside surprise as the ongoing rally seems to suggest they will.
Potential Concerns
That said, not every analyst is fully on board with the bull case. Last month, BNP Paribas initiated coverage of Zscaler with a Neutral rating, reflecting some caution among the ranks. The company’s recent decision to trim forward guidance also raises a red flag, especially since it contrasts with the upward revisions it made earlier this year. This shift in tone from management could be a signal for investors to watch closely.
Additionally, Zscaler’s Relative Strength Index (RSI) currently stands at 72, indicating it may be approaching overbought territory. The RSI is a momentum indicator that ranges from 0 to 100, with readings over 70 suggesting that a stock is potentially overbought. While there is no guarantee of a pullback, it’s something to keep in mind if the stock moves higher in the coming weeks.
Getting Involved
But despite these cautionary notes, it’s hard to disagree that Zscaler’s prospects are looking increasingly bullish as the stock pushes up and out of its recent consolidation range. This ongoing move suggests that the smart money is positioning itself ahead of what could be another strong earnings beat, and an RSI reading of 70 further confirms this momentum.
Investors should expect the stock to continue its upward momentum as anticipation builds for next month’s earnings report. Any short-term profit-taking will likely open up an attractive entry opportunity. Having weathered a bumpy year so far, all signs point to Zscaler closing out 2024 on the front foot and starting 2025 with a pep in its step.
