IBD Stock Analysis
- Stock formed a breakaway earnings gap Friday, soaring by double digits
- Shares are extended from proper entry point, should be on watchlists
- Relative Strength line pointing north; RS Rating stands at 93 out of 99
Industry Group Ranking
* Not real-time data. All data shown was captured at
1:32PM EDT on
Zscaler is the IBD Stock of the Day amid the cybersecurity firm’s surge on stellar fiscal third-quarter earnings. Zscaler stock soared to an all-time high on Friday after earnings handily beat expectations.
The company’s earnings, reported late Thursday, trounced estimates. With Friday’s pop, Zscaler stock is extended from a proper entry point. Investors may want to put Zscaler stock on a watchlist and look for a new base to form.
Zscaler stock soared 29.4% to close at 98.09 on the stock market today. In the process, it formed a breakaway earnings gap.
The company said it earned 7 cents on an adjusted basis vs. a 5-cent profit a year earlier. Revenue rose 40% to $110.5 million. Zscaler said billings, a sales growth metric, rose 55% to $131.3 million vs. estimates of $115.7 million.
Zscaler’s Relative Strength Rating improved in early March after the company noted in a blog that the corporate shift to work-at-home arrangements was boosting demand for its computer security products.
While Zscaler stock rallied in March, shares consolidated ahead of earnings. Some analysts cited its lofty valuation as a multiple of estimated forward revenue.
Also, a big question has been how easily companies could switch to Zscaler’s product amid the Covid-19 pandemic.
Zscaler Stock: Cloud Service replaces VPNs
As more employees worked from home amid the coronavirus pandemic, many companies upgraded virtual private networks, or VPNs. Zscaler gave them another option, with its cloud-based service.
The Zscaler Private Access, or ZPA cloud service, replaces VPNs. San Jose, Calif.-based Zscaler provides cloud services via 150 data centers worldwide.
“ZPA usage grew 10 times during the quarter and accounted for about 43% of new and add-on business, more than doubling from 20% in the first half of fiscal 2020 as ZPA added ‘hundreds of thousands’ of new users,” Cowen analyst Nick Yako said in a report to clients.
Yako added: “Despite the surge in ZPA demand, ample runway remains as only 32% of Zscaler’s Global 2000 customers have purchased ZPA to date.”
Surge In ZPA Use Among Clients
ZPA usage surged mainly among existing customers. But analysts expect more new customers to be added as Zscaler demonstrates that its cloud-based solution outperforms VPNs.
ZPA ensures authorized users can access their private business applications through the cloud without ever connecting to a corporate network,” Zscaler spokesperson Tom Stilwell told IBD in an email.
“This dramatically reduces the attack surface while also delivering a great user experience, both of which are significant issues with legacy solutions like VPNs.”
Aside from the new ZPA product, Zscaler is the biggest provider of web security gateways that inspect customers’ data traffic for malware.
Previous High Was In July 2019
The initial public offering for Zscaler stock in March 2018 raised $192 million. Prior to today’s surge, Zscaler stock hit an all-time high of 89.54 on July 26, 2019.
The stock then broke down in the back half of 2019. Analysts cited increased competition with bigger rival Palo Alto Networks (PANW) as well as sales staff turnover.
Heading into the earnings report, shares were already trading above an entry point of 66.60. With its big move in high volume, Zscaler stock bears watching. But, it’s extended for now.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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