On Friday, Loop Capital adjusted its outlook on Zscaler (NASDAQ:ZS) shares, reducing the price target to $180 from the previous $225 while keeping a Hold rating on the stock.
The firm cited several factors influencing this decision, including the company's consistent performance amidst macroeconomic challenges and changes to its sales approach, which led to a re-acceleration of year-over-year billings growth for the quarter.
Zscaler, known for its zero-trust security architecture, is experiencing a transition in its sales leadership and a shift to a more account-centric sales model. These changes have impacted its execution in the second quarter. Additionally, the company has seen higher-than-expected attrition in its sales team, prompting a cautious approach to its Q4 billings growth guidance and a moderated outlook for FY25 billings growth.
The company's reliance on large deals, particularly with new customers, has been pointed out as a contributing factor to the increased sales execution risk. With 30%-50% of Zscaler's business coming from significant new customer acquisitions, the current sales organization and model transitions are seen as potential risks worth monitoring.
Despite these challenges, Zscaler is recognized by large organizations as a leading solution for zero-trust security, indicating strong product adoption. Loop Capital's revised price target reflects a more conservative cash flow estimate for the company in the longer term, extending into FY27 and beyond.
The firm suggests waiting for the transition risks to subside before changing its stance on Zscaler's stock.
InvestingPro Insights
Amidst the strategic transitions and market challenges faced by Zscaler, InvestingPro offers additional insights that may influence investor perspectives. The company boasts a robust balance sheet, as indicated by an InvestingPro Tip which highlights that Zscaler holds more cash than debt. This financial stability could be a reassuring factor for investors concerned about the company's ability to navigate through the current macroeconomic headwinds and sales team transitions.
From a performance standpoint, Zscaler's impressive gross profit margin of 77.55% over the last twelve months as of Q2 2024, according to InvestingPro Data, underscores the company's ability to maintain profitability in its core operations despite broader market fluctuations. Additionally, analysts are optimistic about Zscaler's growth trajectory, with a notable InvestingPro Tip pointing out that net income is expected to grow this year, and sales growth is anticipated in the current year. These projections suggest potential for recovery and growth, even as the company undergoes significant changes in its sales strategy.
The market's recent response to Zscaler's performance and outlook has led to a notable decline in stock price, with a 35.26% drop over the last three months. Nevertheless, the company's long-term value is reflected in a fair value estimation by InvestingPro at $177.61, which is above the previous closing price of $156.65. Investors seeking to capitalize on these insights and explore additional metrics can find more InvestingPro Tips at https://www.investing.com/pro/ZS. Moreover, for those considering a yearly or biyearly Pro and Pro+ subscription, using the coupon code PRONEWS24 will secure an additional 10% off.
With 15 additional InvestingPro Tips available, investors have a comprehensive toolkit to assess Zscaler's investment potential, taking into account both the immediate impacts of its current transition and the broader trends that may shape its future performance.
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