Why Zscaler Stock Tanked 13% Today

The Motley Fool
The Motley Fool

What happened

High-growth but richly valued tech stocks have been getting hammered by the market as of late, and software cybersecurity disruptor Zscaler (NASDAQ: ZS) hasn't been exempt. The stock was down nearly 13% today as of 12:25 p.m. EST, even though the company posted fantastic results for its fiscal 2022 first quarter (the three months ended Oct. 31) last week.

As for the specific plunge today (Zscaler is up 36% in 2021 with just weeks to go until the new year), analyst Stephen Bersey at Daiwa Capital downgraded Zscaler to underperform and stuck a $286 price target on the stock.

Image source: Getty Images.

So what

Bear in mind this is just one analyst opinion. A slew of other Wall Street prognosticators waxed optimistic on Zscaler last week after the company said revenue grew 62% year over year in the last quarter, and deferred revenue (sales collected from customers, but for which service has not yet been provided) boomed 74% higher. Deferred revenue helps indicate the growth trajectory of cloud-based software firms since they operate on a subscription business model and customers pay in advance for services.

Now what

Take short-term analytical price targets with a grain of salt, especially if you are a long-term investor focusing on the potential for a business years down the road (rather than months). Zscaler is clearly a big winner in the cybersecurity industry as the world adapts to remote work and cloud-based computing, and its momentum is showing little sign of slowing.

The company thinks it will reach the $1 billion sales milestone during its 2022 fiscal year, representing full-year growth of about 49%. And while this is still a somewhat small cybersecurity firm focusing on expansion first and foremost, it has swung to free cash flow positive in recent years.

Trading for about 38 times expected current-year sales, Zscaler remains a premium-priced growth stock even after the recent tumble, but the company's long-term opportunity looks better than ever.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zscaler. The Motley Fool has a disclosure policy .

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