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Zscaler Stock Falls Sharply After an Earnings Beat. Here Is Why.

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Zscaler

stock was poised to take a tumble when markets open Friday after the cloud-based internet security company’s guidance deflated investor enthusiasm, even as its second-quarter results handily beat estimates.

Zscaler (ticker:


ZS

) was falling around 12% to $232.23 in premarket trading on Friday.

For the third quarter ending in April, Zscaler predicts earnings of around 10 cents and 11 cents a share on revenue of $270 million to $272 million, in line with forecasts for 11 cents a share and higher than revenue estimates of $267.4 million.

The company expects fiscal 2022 revenue of $1.045 billion to $1.05 billion, with between $1.365 and $1.37 billion in calculated billings. Adjusted earnings will be about 54 cents to 56 cents a share for the year, the company said. Wall Street predicts earnings of 55 cents a share on $1.035 billion in revenue.

“The stock is under pressure as whisper expectations for the quarter were hoping for a stronger guide for ZS in FY22, which we view as a knee-jerk reaction and a clear buying opportunity,” wrote Wedbush analyst Daniel Ives in a research note on Friday.

Another source of concern for investors was that while Zscaler’s second-quarter results beat estimates, “the beat was not the scale we’d seen previously,” wrote RBC Capital Markets analyst Matthew Hedberg.

Zscaler’s adjusted earnings per share in the second quarter were 13 cents, topping estimates for 11 cents a share Revenue was $255.6 million, beating forecasts for $241.5 million.

Some analysts expressed concern over the company’s deceleration in billings, which slowed to 59% growth, compared to 71% in the previous quarter, Hedberg added. The analyst maintained his Outperform rating, but lowered his price target to $330 from $408 due to peer multiple compression.

Mizuho Securities analyst Gregg Moskowitz agreed that the company’s billings performance could be the main thing pulling the stock down on Friday. During the conference call, management noted that its federal sales segment was only low single-digits due to budget constraints. Despite that, Moskowitz pointed out that short-term billings growth was robust, and seemed to decelerate at a modest degree compared to total billings.

“In short, we understand the AH sell-off, but fundamentally speaking we remain confident that all is alive and well at ZS,” he wrote in a research note Friday.

Moskowitz reiterated a Buy rating, but lowered his price target to $350, down from $360.

Wedbush’s Ives also maintained his Outperform rating, saying that Zscaler still presented an opportunity. He believes the company could be a leader in the cloud protection field, making it a unique growth name to own. Regardless, he also cut his price target to $330 from $400, reflecting a lower multiple in the current market backdrop.

Analyst sentiment has generally improved on the stock, with more70% of analysts covering the stock on FactSet rating it a Buy or Overweight. The mean target price is $342.56.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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