Thursday, an analyst from Bernstein SocGen Group maintained a positive stance on Zscaler shares (NASDAQ:ZS), reiterating an Outperform rating and a $238.00 price target.
The analyst highlighted that despite a decrease in billings growth last quarter, which led to a negative reaction in the stock price, the current focus on billings might be misaligned with the actual health of the business. This mismatch, according to the analyst, could be resulting in an unfair punishment of Zscaler's stock and an oversight of other positive indicators.
The analyst expressed concerns that investors may be overlooking the company's potential due to a preoccupation with billings—a metric that might be more relevant for companies operating under a license and maintenance pricing model. This focus has sparked a debate that could be obscuring what the analyst sees as one of the few absolute return opportunities in their coverage at this time.
In response to the last quarter's developments, the analyst made minor adjustments to their revenue model for Zscaler. These changes aim to better reflect a normal quarter-over-quarter incremental path as sales effectiveness increases and the customer count grows, based on the latest 10Q report.
The analyst also expects Zscaler to achieve higher operating margins through improved sales and marketing leverage as the company's sales effectiveness continues to improve throughout the year.
These projections are backed by a 50/50 rule of 40-based multiples regression, which roughly translates to 14 times the Price to Next (LON:NXT) Twelve Months (NTM) revenue level, and a Discounted Cash Flow (DCF) analysis with a 12% Weighted Average Cost of Capital (WACC) and a 3% terminal growth rate.
In summary, despite the concerns surrounding billings growth, the Bernstein SocGen Group analyst stands firm on the $238 price target for Zscaler, maintaining an Outperform rating based on the company's expected sales effectiveness and customer growth, as well as favorable operational margin improvements.
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