By Zscaler Inc. (NASDAQ: ZS) experienced a significant decline in its stock price on Wednesday, plummeting over 17% following the release of its fiscal Q4 2024 results and a disappointing outlook for FY 2025 on Tuesday.
This decline was exacerbated by multiple analysts revising their ratings and lowering price targets.
J.P. Morgan’s Brian Essex, for instance, highlighted that while the company delivered solid Q4 results, the guidance for the first half of FY 2025 billings was weaker than expected.
Essex, who retained an Overweight rating, adjusted his price target down to $220 from $230, reflecting the softer billings guidance.
UBS analyst Roger Boyd also expressed concerns, particularly around management’s conservative guidance, and subsequently reduced his price target from $270 to $250 while maintaining a Buy rating.
Similarly, Wells Fargo’s Andrew Nowinski cut his price target to $180 from $182, indicating a broader sentiment of caution among analysts.
Zscaler’s FY25 outlook disappoints
The Q4 2024 results themselves, while strong on paper, were overshadowed by the weak FY25 outlook.
Zscaler reported adjusted earnings of $0.88 per share, surpassing the consensus estimate of $0.69.
Revenue grew 30% year-over-year to $592.9 million, also beating expectations. However, the forward guidance for FY 2025 significantly disappointed investors.
The company forecasted adjusted earnings of $2.81 to $2.87 per share, with a midpoint of $2.84, substantially below the estimated $3.36.
Similarly, the revenue guidance of $2.6 billion to $2.62 billion, with a midpoint of $2.61 billion, was slightly under the expected $2.63 billion.
Zscaler’s financial position, while strong, does not fully offset concerns about its slowing growth and profitability.
The company’s balance sheet remains solid, with cash, cash equivalents and short-term investments of $2,409.7 million as of July 31, 2024.
Zscaler has also improved its non-GAAP operating margins, reporting a 22% margin in Q4 2024, up from 19% in the previous year.
However, the guidance for FY 2025 suggests a slight decline in profitability, with operating margins expected to dip to approximately 21%.
This slight reduction in profitability, despite the company’s scale, is concerning for investors who expect margin expansion as the company grows.
Revenue growth to decelerate
Zscaler remains a leader in the cloud security space, yet its recent performance raises concerns about its growth trajectory.
Despite the strong Q4 2024 results, the company is facing deceleration in its revenue growth.
This upcoming fiscal year is projected to be the tenth consecutive quarter of revenue growth deceleration, a concerning trend for a company valued at 46 times forward non-GAAP operating profits.
On the positive side, the company continues to see strong customer adoption of its Zero Trust Exchange platform, with key partnerships, such as those with Google Chrome Enterprise and NVIDIA, bolstering its market position.
However, the cybersecurity market is highly competitive, with significant challenges from players like Palo Alto Networks.
Zscaler’s focus on expanding its AI Data Protection capabilities and its strategic acquisitions like Avalor underscore its commitment to innovation and growth, but the broader market dynamics and competition remain significant challenges.
With these factors in mind, understanding the stock’s future price trajectory requires a closer examination of charts and the technical indicators.
By analyzing the stock’s chart patterns, moving averages, and other key technical metrics, we can gain further insights into where Zscaler might be headed in the weeks and months ahead.
Let’s delve into the technical analysis to better understand the stock’s current momentum and potential future movements.
Zscaler’s stock continue on its downtrend
Although Zscaler’s stock has been on a long-term downtrend since late 2021 when it was trading above $350, it experienced a significant bounce back last year from $85 levels to above $240.
Source: TradingView
The stock again entered a downtrend in the medium-term charts in February this year. Moreover, it recently made a double top near $204 recently, which is a strong bearish signal.
Considering that bulls must exercise caution and not enter the stock at current prices. A long position must only be considered if the stock starts trading above its 100-day moving average.
Traders who are bearish on the stock after today’s drop must ideally wait for a bounce back to initiate a fresh short position.
However, if it continues to trade below $160 that will indicate continued weakness and a short position can be considered then with a stop loss above $71.8.
If the momentum remains weak, the stock will next find support near the $122 level, where one can book profits.
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