Zscaler (NASDAQ: ZS) can set a fresh multiyear high in 2025, and the move could come before mid-year and happen quickly. It could happen soon because the company’s results and guidance are better than expected, and the analysts are re-engaging with the market.
[content-module:Forecast|NASDAQ:ZS]Analysts' sentiment didn’t sour in 2024, but few catalysts emerged to drive it, and price targets were reduced. The story in 2025 following the FQ2 earnings release and guidance update is that the group has begun to upgrade and lift price targets, pointing to a 20% upside for this market.
MarketBeat tracked five revisions within the first few hours of the report, and all are positive. Rosenblatt Securities upgraded the stock to Buy from Hold and lifted its price target, while Robert Baird, JPMorgan Chase & Co. Deutsche Bank, and Wedbush all increased their price targets, and all new targets are above the pre-release consensus. They see this stock moving to $242.50 at the mean and $255 at the high-end range. A move to these levels would align the market with existing multiyear highs and set it up to reach new highs later in the year.
Institutional activity aligns with the shift in analyst sentiment and supports the stock’s price. They reverted to buying from selling in Q4 2024 and ramped up their activity in Q1 2025. Q1 2025 buying isn’t a record but is elevated relative to the trend, providing a tailwind for the market. They own nearly 50% of the stock in early 2025 and may continue adding to positions as the year progresses.
Zscaler Wows Market With Beat-and-Raise Quarter
Zscaler’s results are impressive despite the slow-down in top-line growth. The company reported $647.9 million in consolidated revenue, up 23.4% compared to the prior year and beat MarketBeat’s reported consensus by 200 basis points. Strength was driven by the increased use of digital by businesses globally, increased adoption of zero-trust cybersecurity architecture, and penetrating services. Internal metrics, including billings, up 18%, and deferred revenue, up 25%, were also strong.
The margin, cash flow, and free cash flow are critical to the analysts’ sentiment shift. The company experienced margin pressure but far less than forecasted, leaving the adjusted net income up 27.9% compared to the slower top-line growth of 23.4%. That’s 1300 basis points better than expected, and the strength is carried through into the guidance.
The company’s guidance for Q3 is tepid relative to the analysts' forecasts, with revenue slightly below consensus and earnings slightly below. However, the company expects an improvement in Q4 sufficient to drive full-year revenue and earnings above the analysts' targets at the low-end range. The opportunity for investors is that guidance is cautious and/or strength will carry into the next fiscal year, helping sustain the analysts’ upgrade cycle.
Zscaler Builds Value for Investors in 2025
Zscaler’s operational quality and cash flow are among the reasons bullish sentiment is improving and price pressure is building. The company’s 2025 cash flow is positive and sufficient to enhance shareholder value significantly.
The company’s Q2 balance sheet highlights include increased current assets due to cash and investments and increased total assets due to current assets and property, offset by slightly lower liability. The result is a 26% increase in shareholder equity. Regarding leverage, total liability is about 2x equity, and virtually no long-term debt exists.
The price action in ZS shares is bullish following the release. The share price is up more than 3% in premarket trading and is showing support at the 30-day EMA. Assuming the market follows through on the signals given, price action should continue to increase in March. The critical resistance targets are near $212, $230, and $255.
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