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.
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