Cloud security provider Zscaler is Wednesday's IBD 50 Stocks To Watch pick. The leading cybersecurity company has proved itself with continuous robust earnings and sales growth.
Zscaler provides secure internet access, data protection, secure connectivity to IoT devices and industrial operational technology (OT), and network and application security. The company uses a software-as-a-service (SaaS) business model on a subscription basis.
According to Zscaler, the frequency of ransomware attacks has increased by nearly 40% over the last year. The cloud security company announced in June its advanced security solutions designed for IT and security teams to leverage generative AI to detect attacks.
Cloud Security Stock Building A Base
On Tuesday, BTIG analyst Gray Powell upgraded the cloud security stock to buy from neutral with a 185 price target. He said he has a "much higher degree of confidence" that the company can maintain a 30% or higher level of revenue growth in the next few years, according to a MarketWatch article.
The news lifted the stock 4.6% on Tuesday. In separate news, competitor F5 reported a strong earnings report late Monday that helped boost cybersecurity stocks.
Zscaler stock is forming an irregular base with a 162.67 buy point. Shares popped 5.4% shortly after the cloud security company reported its strong April-ended quarterly results on June 1. The stock climbed to a peak in mid-June before pulling back to its 21-day exponential moving average.
Cybersecurity stocks fell on July 12, on news a Big Tech firm was planning on entering the network security arena. Zscaler stock quickly recovered the next day after Needham reiterated a strong buy on the stock and maintained its 210 price target, saying Zscaler offers superior security features and architecture.
Shares tested and bounced off the 10-week moving average in two out of the last three weeks.
The stock gained nearly 40% this year so far, but has a long way to go to get back to its 376.11 all-time high on Nov. 19, 2021.
Stellar Earnings Growth Expected To Continue
Zscaler reported better-than-expected April-ended quarterly earnings and sales on June 1. The cybersecurity company kept its explosive EPS growth trend going with a 182% increase over last year's same quarter, following 185% and 107% growth in the prior two quarters.
Quarterly sales growth slowed to 46% from 52% and 54% in the same time periods a year ago. Free cash flow increased both in dollar amounts and as a percent of revenue over last year's quarter.
"On a year-over-year basis, we delivered 46% revenue growth, 40% billings growth, and 135% operating profit growth, all exceeding our guidance from last quarter," said Jay Chaudhry, Zscaler Chairman and CEO, in the earnings news release.
"We have a strong and loyal base of customers, with gross retention rates in the high 90s," Chaudhry said in a prepared statement.
Addressing the concern raised a few quarters ago that customers were analyzing their budgets, he added: "In my conversations with hundreds of IT executives, cybersecurity remains their No. 1 IT priority."
Zscaler expects Q4 revenue of $429 million to $431 million and fiscal 2023 sales of $1.591 billion to $1.593 billion. Analysts expect outstanding 137% EPS growth in fiscal 2023 and 29% in 2024.
The cloud security company is ranked No. 1 out of 37 stocks in the computer software-security group. The company holds top-notch 99 Composite and EPS Ratings.
Follow Kimberley Koenig for more stock news on Twitter @IBD_KKoenig.
