Zscaler is a buy stock dipping after earnings

Zscaler NASDAQ:HP had a strong second quarter and raised forecasts, but it wasn’t enough to lift the market. The results and valuation suggest the stock is perfectly priced following the post-release price drop, and there are growth headwinds in the air.

Trading at 100X earnings estimates this year and 80X next year, it will take years for this company to reach its current valuation and may not grow as fast as expected, given Palo Alto Networks NASDAQ: PANW lean on the platform. Palo Alto Networks is working to centralize its product line and offer free services to attract new customers. Since it is the largest and leader in the cybersecurity field, its efforts will impact Zscaler and other names in cybersecurity.

However, this headwind is offset by analyst sentiment and depth of coverage, which points to new highs for the stock. Marketbeat.com tracks thirty-seven analysts with current ratings and rates the stock at Moderate Buy. This is a solid base of support and they have raised their price targets. The consensus had lagged the market before the release, but rose 20% year over year and is stable following the news. The dip following the release briefly brought the market in line with the consensus, but the price action is up from pre-open lows.

The first revisions to arrive are mixed and come from Wedbush, Bernstein and Needham, including an upside, a downside and a reiterated target with a three-analyst consensus of $276. This target is 20% above post-release action and represents a two-year high for Zscaler. Wedbush’s Dan Ives called the quarter impressive and Zscaler a top name to own as the shift to cloud-based cybersecurity accelerates.

Zscaler had a solid quarter and improved guidance

Zscaler had a solid quarter, with outperformance across all metrics and guidance above analyst consensus. The company reports net sales of $525.0 million, an increase of 35.4% over last year. The 35.4% growth represents another sequential slowdown, but is 350 basis points higher than consensus, compounded by margin and guidance. Calculated invoices and deferred revenue grew 27% and 35%, respectively.

Margin news is the best. The company significantly reduced GAAP losses thanks to leverage and spending controls, while adjusted operating margin increased 700 basis points. The net result is revenue more than doubled, leaving adjusted earnings $0.76, or $0.18 above forecast. Cash flow and FCF also grew significantly, increasing 27% and 19% year over year.

Driving is another factor that should help increase the stock over time. The company raised its guidance for the third quarter and the year to above consensus. The new guidance called for adjusted earnings of $2.73 to $2.77 versus the consensus of $2.48, and the guidance could be raised again by the end of the year. The company’s latest offering restructures how access is granted based on client company policy, allowing users to determine access, not location or device, and could gain traction over the course of year.

Zscaler creates capital for shareholders

Zscaler is firing on all cylinders and providing solid cash flow for operations. The third quarter results allowed for a further increase in liquidity and an improvement in the balance sheet, driving a 32% increase in equity. Cash flow will remain solid through the end of the year and into next year, so further earnings are expected and could help lift the market.

ZS stock price action is bearish in early premarket trading, but there are some signs that investors are buying the news-driven dip. Market support appears solid above the 150-day EMA and analysts are favorable, so a rebound could begin soon. In this scenario, the market could quickly recover from the post-release plunge and retest recent highs. Critical resistance is near $250; a move above that level would be bullish. The risk is that Zscaler could remain range-bound at current levels and move sideways until the end of the year.

Before considering Zscaler, you’ll want to hear it out.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Zscaler wasn’t on the list.

While Zscaler currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here