On Wednesday, UBS adjusted its outlook on Zscaler Inc . (NASDAQ:ZS), a leader in cloud-based security services, by reducing its price target to $270 from $300. Despite this change, the firm maintained its Buy rating on the stock. This revision comes amid tempered expectations for the company's performance in the second half of fiscal year 2024 and the full fiscal year 2025.
The investment firm noted that the risk/reward profile for Zscaler's shares is becoming more attractive as forecasted growth for the future appears to be slowing down. The analyst from UBS suggested that if the concerns regarding the growth in fiscal year 2025 are valid, Zscaler might shift its focus towards increasing profitability, which could lead to higher margins than currently anticipated by the market.
UBS anticipates that Zscaler could outperform the market's expectations for free cash flow margin (FCFm) and operating margin (OpM), which are projected to be 23.5% and 20% respectively in fiscal year 2025. The firm's evaluation implies that the current stock valuation, at 8 times fiscal year 2025 estimated enterprise value to sales (EV/S) and 30 times enterprise value to free cash flow (EV/FCF), reflects an assumption of mid-teens growth. UBS considers this to be excessively conservative.
The assessment by UBS suggests that Zscaler's current stock price may not fully reflect the company's growth potential, particularly if the company leans into profitability strategies in response to the growth outlook. The firm's maintained Buy rating indicates a continued positive outlook on Zscaler's shares despite the lowered price target.
InvestingPro Insights
As Zscaler Inc. navigates through its fiscal challenges, real-time data from InvestingPro provides a more nuanced view of the company's financial health and market position. Zscaler's market capitalization stands at $24.6 billion, underscoring its significant presence in the cloud-based security services sector. Despite not being profitable over the last twelve months, the company is expected to grow its net income this year, as indicated by a robust 40.62% revenue growth in the last twelve months as of Q2 2024. This is complemented by an impressive gross profit margin of 77.55%.
InvestingPro Tips highlight Zscaler's strong liquidity position, with more cash than debt on the balance sheet and liquid assets that exceed short-term obligations. This financial stability is crucial as the company aims to pivot towards profitability, aligning with UBS's insights on potential margin improvements. Additionally, while the stock price has experienced a significant drop over the last three months, analysts predict profitability this year, which could be a catalyst for a rebound.
For investors seeking a deeper analysis, InvestingPro offers additional tips that could shed light on Zscaler's valuation and future performance. By using the coupon code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a wealth of insights including 9 more InvestingPro Tips for Zscaler. These tips can further inform investment decisions and provide a competitive edge in understanding the market's dynamics.
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