Growing cybersecurity demands set to lift Zscaler shares

Zscaler’s [ZS] share price performance has measured up well during the past year, boosted by an increase in digitalisation during the coronavirus pandemic.

Zscaler’s share price rocketed 198.8%, from $75.80 at close on 28 May 2020 to an all-time closing high of $226.48 on 12 February.

Shares in the IT cloud security firm were helped by businesses looking to both enhance security as employees began working from home, and move more applications to the cloud.

The stock was also boosted by high-profile cybersecurity breaches, including an attack in December on Solarwinds’ [SWI] Orion platform, which provides IT infrastructure software management for the US government.

However, since February, Zscaler’s share price has retreated, falling to $165.79 on 30 March then $160.92 on 13 May, before closing at $170.08 on 21 May.

The slump was despite a strong second quarter fiscal 2021 results in February. Jay Chaudhry (pictured above), CEO of Zscaler, said on the earnings call that its Zero Trust platform “drove 55% growth in revenue and 71% growth in billings”.

Analysts have forecast underwhelming third quarter earnings per share of between $0.07 and $0.08 for its third quarter fiscal 2021 results, due on 25 May.

As Zscaler prepares to release its third quarter earnings, will its share price continue to slide or regain its upward momentum?

Zero Trust Exchange key to positive earnings forecast

Zacks Equity Research expects Zscaler to report revenues of $164.4m, a 48.8% leap from the same quarter last year.

The research firm says the figures are “likely to reflect continued solid demand for its security and networking products, given the healthy environment of the global security market”, reported Yahoo Finance.

"[Zscaler's earnings are] likely to reflect continued solid demand for its security and networking products" - Zacks Equity Research

As a large chunk of the global workforce was still working remotely, the company said an increasing number of people logging into employers' networks had prompted a greater need for security.

It added: “Solid adoption of the company’s Zero Trust Exchange platform owing to the ongoing digital transformation across enterprises is expected to have been a key catalyst.”

Zacks Equity Research also commended Zscaler’s partnerships with VMware [VMW], Microsoft [MSFT] and CrowdStrike [CRWD] in facilitating deployment of its Software-Defined Wide Area Network (SD-WAN) solutions. This can help secure internet connections and deliver threat prevention as a cloud service.

For the full year, Zacks Equity Research expects earnings of $0.40 per share, up 66.7% on the previous year, and revenues of $638.05m, up 48% from the year-ago period.

The longer-term outlook also appears strong, according to MarketsandMarkets, with the global cloud security market set to climb from $34.5bn in 2020 to $68.5bn in 2025.

It will be driven, it stated, by “the increasing number of sophisticated cyber-attacks on cloud computing systems, and growing need for compliance with various upcoming regulations”.

The pandemic will also be a driver as continued work-from-home, and bring-your-own-device trends mean digital becomes the new “business continuity plan for various organisations”.

However, there are challenges ahead for Zscaler, with potentially less money being spent on security by firms blasted by the pandemic, such as airlines. Tech competitors, including Amazon [AMZN], are also creating more security tools, which means increased competition.

Growing demand for cybersecurity

According to MarketScree​ner, analysts are bullish, offering an overall outperform rating on Zscaler’s share price with an average price of $229.12.

Matthew Hedberg, an analyst at RBC Capital, which set a $250 price target earlier this year, said the recent cyberattack on US-based company Colonial Pipeline by Russian-based ransomware organisation DarkSide could lead to more demand for firms like Zscaler. Colonial ended up paying a $4.4m bitcoin ransom to get operational again.

“Given the stakes, it comes as no surprise that we expect cyberattacks to continue, which could force the public and private sector to re-evaluate and likely increase cybersecurity spending,” said Hedberg, according to Investor’s Business Daily.

"It comes as no surprise that we expect cyberattacks to continue" - Matthew Hedburg, RBC Capital

Mizuho Securities, which had a buy rating and a $205 target on Zscaler’s share price, said the company would be in prime position to benefit. “We believe Zscaler is a next-gen cybersecurity pioneer, and its unique and highly scalable cloud security architecture is enabling organizations to more securely access their critical applications and data,” Gregg Moskowitz, an analyst with Mizuho, said according to a report by Business Insider. “We see healthy upside as the company grows into its opportunity.”

Cybersecurity-themed ETFs that have Zscaler shares as a holding could also benefit. The First Trust Nasdaq Cybersecurity ETF [CIBR] has climbed from $31.08 on 22 May last year to $43.65 at close on 21 May. Meanwhile, the iShares Cybersecurity & Tech ETF [IHAK] has climbed from $30.75 on 30 October to $39.96 at close on 21 May.