1 Growth Stock to Buy Hand Over Fist Before 140% Jump

On February 29, Zscaler's (NASDAQ: ZS) second-quarter fiscal 2024 earnings (for the three months ended Jan. 31) disappointed investors, sending shares down more than 9%. Investor panic was unexpected. The cybersecurity specialist beat Wall Street's revenue and earnings projections and indicated favorably for the quarter. Let's analyze Zscaler's quarterly performance and why its drop may be an opportunity for smart investors to buy a fast-growing firm.

Zscaler announced $525 million in fiscal Q2 revenue, up 35% from last year. The company's non-GAAP net income more than doubled to $0.76 per share last quarter from $0.37 per share. Analysts expected Zscaler to earn $0.58 per share on $507.6 million in revenue, but its growing client base and rising customer spending helped it beat consensus.

Zscaler expects full-year revenue to reach $2.12 billion at the midpoint of its guidance range, up 31% year-over-year. It previously predicted $2.09 billion to $2.10 billion in annual revenue. For fiscal 2024, Zscaler predicts non-GAAP earnings of $2.75 per share, up 54% from the prior year. The company's full-year expectations beat Wall Street's predictions of $2.49 per share in earnings on $2.1 billion in revenue.

Thus, Zscaler stock's drop after earnings seems unwarranted. Given its high sales multiple of 18, investors may have expected more from Zscaler. However, the company's sales pipeline and end-market opportunity suggest it might develop at a healthy pace for a long time and justify its price.

Last quarter's deferred revenue rose 35% to $1.5 billion, according to Zscaler. A corporation collects prepayment for later services. Deferred revenue becomes actual revenue on the income statement after services are rendered. The huge jump in this indicator suggests Zscaler has a strong sales pipeline to support its expansion.

Zscaler's future revenue visibility is improving since clients are paying more on zero-trust cybersecurity products. It added 31% more customers with $1 million in annual recurring income. Over the past year, the number of customers with $100,000 ARR increased 21%. The 2032 zero-trust security market is predicted to earn $118 billion, up from $25 billion in 2022. Thus, Zscaler believes it is just touching the surface of a $5 billion ARR opportunity.

Company revenue should hit $3.3 billion by fiscal 2026. The fiscal 2023 top line of $1.62 billion would yield a three-year revenue CAGR of over 27%. A 25% sales CAGR in the two fiscal years following fiscal 2026 may boost Zscaler's top line to $5.2 billion, close to its long-term goal of $5 billion.

If it generates $5.2 billion in revenue in fiscal 2028 and trades at 15 times sales, a discount to its present sales multiple, its market valuation may rise to $78 billion. It would rise 140% from current levels. Its long-term prospects suggest solid increases, so investors seeking for a growth company might examine Zscaler.