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1 Growth Stock to Buy Hand Over Fist Before It Jumps 140%

Motley Fool - Fri Mar 8, 5:39AM CST

Investors were not impressed with Zscaler's (NASDAQ: ZS) latest results for the second quarter of fiscal 2024 (for the three months ended Jan. 31), which were released on Feb. 29, as shares of the cybersecurity specialist fell more than 9% following the report.

However, it was surprising to see investors press the panic button. The cybersecurity specialist not only crushed Wall Street's revenue and earnings estimates but also guided strongly for the current quarter. Let's take a closer look at Zscaler's quarterly performance and check why its pullback could be an opportunity for savvy investors to add a fast-growing company to their portfolios.

Zscaler's impressive growth seems sustainable

Zscaler reported fiscal Q2 revenue of $525 million, a jump of 35% from the same quarter last year. Meanwhile, the company's non-GAAP net income more than doubled year over year to $0.76 per share last quarter as compared to $0.37 per share in the year-ago period. Analysts were expecting Zscaler to deliver $0.58 per share in earnings on revenue of $507.6 million, but its growing customer base and an increase in spending by existing customers allowed it to easily crush consensus estimates.

CEO Jay Chaudhry remarked on Zscaler's latest earnings conference call:

Strong customer interest in our platform drove a record first-half total bookings with nearly half of net new bookings coming from new logo customers.

We added a record number of new logos for our Q2. This demonstrates the momentum in our business, and we are increasing our outlook for revenue and billings for fiscal 2024.

Zscaler is now anticipating full-year revenue to land at $2.12 billion at the midpoint of its guidance range, which would translate into a year-over-year jump of 31%. It was earlier predicting $2.09 billion to $2.10 billion in revenue for the year. Additionally, Zscaler expects non-GAAP earnings of $2.75 per share for fiscal 2024, which points toward a 54% increase over the previous year. It is worth noting that the company's full-year forecasts exceed Wall Street's prediction of $2.49 per share in earnings on $2.1 billion in revenue.

So, Zscaler stock's plunge following its earnings report doesn't seem justified. Of course, there is a possibility that investors were expecting more from Zscaler considering its rich sales multiple of 18. However, a closer look at the company's sales pipeline and the end-market opportunity it is sitting on suggests that it could keep growing at a healthy pace for a long time and justify its valuation.

Zscaler points out that its deferred revenue increased 35% year over year to $1.5 billion last quarter. This metric refers to money collected in advance by a company for services that will be delivered later. The deferred revenue is recognized as actual revenue on the income statement once the services are delivered. So, the impressive spike in this metric indicates that Zscaler has a healthy revenue pipeline that could allow it to sustain its solid growth.

One of the reasons why Zscaler's future revenue visibility is improving is because customers are spending more money on its zero-trust cybersecurity solutions. It witnessed a 31% year-over-year increase in the number of customers who have generated at least $1 million in annual recurring revenue (ARR). Meanwhile, the number of customers with at least $100,000 in ARR was up 21% over the prior year.

The zero-trust security market is expected to generate $118 billion in revenue in 2032 as compared to $25 billion in 2022. Zscaler, therefore, is scratching the surface of a big opportunity and is confident of eventually generating $5 billion in ARR in the long run.

The stock could regain its mojo and head higher

As the following chart indicates, analysts have been raising their revenue-growth expectations for Zscaler.

ZS Revenue Estimates for Current Fiscal Year Chart

ZS Revenue Estimates for Current Fiscal Year data by YCharts.

By fiscal 2026, the company's revenue is expected to exceed $3.3 billion. That would translate into a three-year revenue compound annual growth rate (CAGR) of almost 27% based on the fiscal 2023 top line of $1.62 billion. If Zscaler can clock a 25% revenue CAGR in the two fiscal years following fiscal 2026, its top line could increase to $5.2 billion, which will be close to its long-term expectation of generating $5 billion in annual revenue.

Assuming it can indeed generate $5.2 billion in revenue in fiscal 2028 and trades at 15 times sales at that time, which will be a discount to its current-sales multiple, its market cap could increase to $78 billion. That would be a 140% increase from current levels. That's why investors looking to add a growth stock to their portfolios should consider buying Zscaler as its rosy long-term prospects point toward solid gains in the future.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zscaler. The Motley Fool has a disclosure policy.

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