Zscaler stock plummets as profit outlook sparks investor concerns despite earnings beat

Zscaler Inc., a prominent player in the cybersecurity space, experienced a sharp decline in its stock value after hours on September 3, 2024, despite posting robust quarterly results. The company’s disappointing profit outlook for the upcoming fiscal year alarmed investors, leading to a 13% drop in its share price. The market reaction highlights the volatility surrounding technology stocks as enterprises reassess their tech spending amidst economic uncertainties.

Zscaler reported adjusted earnings per share (EPS) of $0.88 for the fourth quarter of fiscal 2024, outperforming analyst estimates of $0.70. The company also achieved revenue of $592.9 million, marking a 30% increase from the same period last year and surpassing the consensus forecast of $567.46 million. Additionally, adjusted income from operations rose to $127.5 million, up from $86 million a year earlier, while cash flow from operations climbed to $203.6 million from $135.9 million over the same period. This positive financial performance, however, failed to overshadow the more cautious guidance provided for fiscal 2025.

Weak Profit Forecast Overshadows Earnings Beat

For fiscal 2025, Zscaler projected adjusted earnings per share between $2.81 and $2.87, significantly below the $3.01 per share anticipated by Wall Street analysts. The company also set its revenue guidance between $2.60 billion and $2.62 billion, which aligned with analyst expectations but was not enough to reassure the market. Zscaler’s CEO, Jay Chaudhry, attributed the conservative forecast to tightened technology budgets among enterprise customers, who are exercising caution in response to the broader economic environment. This sentiment was reflected in Zscaler’s guidance for the first quarter of fiscal 2025, where the company expects adjusted earnings per share of $0.62 to $0.63 on revenue between $604 million and $606 million, missing the analyst forecast of $0.73 per share.

Technical Analysis: Key Price Levels to Watch

From a technical analysis perspective, Zscaler’s stock has been under pressure for several months. The stock has traded sideways since May 2024, when the 50-day moving average crossed below the 200-day moving average, forming a “death cross,” a bearish signal indicating potential further declines. After the earnings announcement, Zscaler’s stock dropped to around $164.10 in after-hours trading. Analysts point to key support levels at $164, $143, and $135, suggesting these could be critical points where the stock might find buying interest or further resistance, depending on market sentiment.

Strategic Moves and Innovations Amidst the Turbulence

Despite the stock’s decline, Zscaler has been proactive in expanding its capabilities and partnerships to drive future growth. The company recently announced a strategic alliance with Google LLC to enhance secure application access and data protection for enterprise customers using Google Workspace and Chrome Enterprise. This partnership aims to strengthen Zscaler’s position in the cloud security market by integrating with Google’s platforms to provide advanced security features and enhanced threat detection capabilities. Moreover, Zscaler unveiled new artificial intelligence-driven data protection tools designed to safeguard data across various platforms, positioning itself as a leader in cybersecurity innovation.

Expert Opinion: A Volatile Path Ahead

Industry experts caution that while Zscaler’s strategic initiatives could yield long-term benefits, the short-term outlook remains clouded by macroeconomic uncertainties and fluctuating market conditions. The cybersecurity sector is highly competitive, and Zscaler’s ability to maintain its growth trajectory will depend on how effectively it can manage both internal and external challenges. Investors should closely monitor the company’s quarterly performance and any shifts in enterprise technology spending that could impact Zscaler’s financial health.

Conclusion: Balancing Optimism with Caution

Zscaler’s strong Q4 results underscore the company’s potential to thrive in a challenging market, yet the lowered profit outlook for fiscal 2025 reflects the complexities of the current economic landscape. While the company’s innovative strategies and partnerships with tech giants like Google offer promising growth avenues, the immediate future may be turbulent. Investors should approach Zscaler with a balanced perspective, considering both the opportunities and risks inherent in the evolving cybersecurity sector.