Zscaler stock soars 17% after Q3 earnings beat: Buy or pass?

Zscaler Inc. (NASDAQ:ZS) reported impressive Q3 results after markets closed yesterday, causing its stock to soar by 17% in pre market trading today. The company achieved a non-GAAP EPS of $0.88, surpassing expectations by $0.23. Revenue also exceeded forecasts, reaching $553.2 million, a 32.1% year-over-year increase.

Deferred revenue grew by 34% year-over-year, totaling $1,577 million, highlighting strong future revenue prospects. Zscaler’s cash, cash equivalents, and short-term investments rose to $2.24 billion, an increase of $139.8 million since July 31, 2023.

The company’s Q4 outlook is positive, with projected revenue between $565 million and $567 million. Non-GAAP income from operations is expected to be $107 million to $109 million. Full-year fiscal 2024 revenue is anticipated to be approximately $2.14 billion.

Zscaler’s recent acquisitions of Avalor Technologies and Airgap Networks enhance its AI capabilities and Zero Trust leadership. These strategic moves aim to bolster the company’s market position and drive innovation in cloud security solutions.

The company’s fundamentals remain strong, with significant growth in non-GAAP net income and cash flow from operations. Its balance sheet is robust, showing substantial cash reserves and manageable debt levels.

Despite past concerns about declining revenue growth, Zscaler’s recent performance suggests resilience and potential for sustained growth. The cybersecurity industry’s ongoing shift towards AI and Zero Trust security models positions Zscaler well for future opportunities.

Analysts have varied ratings for Zscaler, reflecting a cautious optimism. While some have lowered price targets due to competitive concerns, others see strong growth potential based on recent channel feedback and federal business performance.

Baird analysts believe Zscaler’s Q3 results could counter recent negative sentiment and reaffirm its market potential. Some analysts believe that though Zscaler’s valuation remains high, its strong performance and strategic acquisitions justify that premium. Investors should weigh the risks of competition against the company’s innovative approach and market leadership in cloud security.

Now, let’s see what the charts have to say. The technical analysis will provide further insights into whether Zscaler’s stock is a buy or pass based on recent market movements and trends.

Despite today’s strong upward movement, Zscaler’s stock remains weak on daily charts. From a high of $376.11 in November 2021, it crashed to around $85 by May 2023. Although it made a significant recovery over the next 9 months, it seems to have hit resistance near $260 in February this year and retraced to around $150.

ZS chart by TradingView

Furthermore, the stock’s 100-day moving average has crossed below its 200-day moving average, indicating potential weakness. However, today’s move could signal a trend change. Investors bullish on the stock might consider buying at current levels while keeping a stop loss at $142.35.

For traders who remain bearish, it is crucial to monitor price action closely. If the stock loses its bullish momentum, they can initiate a short position above $180 with a stop loss at $202.7. If the stock declines, they can aim to book profits near $140.

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