The Ratings Game: Zscaler stock surges 22% for best day since IPO as strong forecast leads to ‘relief rally’

Zscaler topped the Wall Street consensus across the board for its quarterly results and outlook for the year on Thursday, prompting analysts to raise their fiscal forecasts to an average $1.16 a share on revenue of $1.49 billion and billings of $1.94 billion. Before Zscaler’s report, analysts had forecast earnings of $1.04 a share on revenue of $1.47 billion and billings of $1.86 billion for the year.

Citi Research analyst Fatima Boolani, who has a buy rating, said Zscaler’s “robust print should mute percolating competitive fears,” and that stock action after the report was “a relief rally” as shares were down 52% for the year to date as of Thursday’s close.

“More importantly, despite the strong FY22 finish, FY23E billings outlook of ~30% [uear-over-year] at the midpoint still matched Street’s expectations — that on a higher base,” Boolani said.

Full earnings coverage: Zscaler stock scales higher after hours as earnings, outlook surpass Street view

Summit Insights Group analyst Srini Nandury lowered his price target to $200 from $225 “due to multiple compression across the market,” but kept his buy rating on the stock and expects “another blockbuster quarter when the company reports in December.”

“Zscaler was a little bit more cautious on the 2H of F2023, as many companies will likely reset their IT spending lower to accommodate for macro turbulence, but was more optimistic on 1H of F2023,” the Summit analyst said.

“While Zscaler remains the undisputed leader at the high-end of the enterprise with its wide and extensible platform, we believe in the midmarket there could be competition from a variety of players, including Netskope and Palo Alto Networks” Nandury said.

In late August, Palo Alto Networks Inc.
PANW,
+3.20%
results topped Street expectations and forecast a strong, but “prudent,” fiscal 2023 as business-spending budgets come under scrutiny.

See also: Here’s how Palo Alto Networks stacks up against its main competitors

Wedbush analyst Daniel Ives, who has a $200 price target and an outperform rating, said that billings, at 57% growth, were “the star of the show despite fears heading into the print” because of macroeconomic uncertainty.

“The company added 327 customers (up 62% y/y) with greater than $1 million in [annual recurring revenue] and now have over 20 customers with greater than $5 million in ARR, an impressive performance as the company’s unique product suite is in the sweet spot as more enterprises shift workloads to the cloud with the Zscaler approach on zero trust architecture,” Ives said.

UBS analyst Roger Boyd, who has a buy rating and a $200 price target, said “all things considered,” the earnings report was “good,” and the outlook was “decent.”

Boyd said Zscaler’s billings forecast of $1.92 billion to $1.94 billion was “more than typically conservative” but said it was also facing an assumption for longer sales cycles, and uncertainty around 2023 business budgets.

“Net, we think this is a good initial guide de-risked for a tough environment, that likely leaves room for upside especially as we get into CY23,” Boyd said.

Opinion: Step aside, FAANMGs. This new crop of tech companies are the ones to watch for the next decade.

Of the 31 analysts surveyed by FactSet who cover Zscaler, 27 have buy ratings and four have hold ratings. Of those, 12 raised their price targets following Thursday’s report, while two lowered theirs, resulting in an average target price of $210.21 a share, compared with a previous $206.07.

While Zscaler shares are currently down 41% year to date, the S&P 500 index 
SPX,
+1.53%
is down 15%, the tech-heavy Nasdaq Composite Index
COMP,
+2.11%
is of 23%, and the ETFMG Prime Cyber Security ETF
HACK,
+3.31%
is down 21%.