If you haven't noticed, former Sarge darling Zscaler (ZS) was running hot this morning. While I may have very publicly left Zscaler this past Autumn, I have never lost faith in cybersecurity as the one sub-sector of the software space that would prove indispensable over the long term.
Valuation was the problem when I sold, not demand. No need to shed a tear. I sold ZS last August through September, making my final sale with a $182 handle. The stock closed on Friday at $89.46. I see it trading ahead of this morning's opening bell with a $109 handle, up more than 22%. I am currently long Palo Alto Networks (PANW) , CrowdStrike (CRWD) and SentinelOne (S) , all of whom were up as part of Zscaler's Monday morning "pin action."
Astute traders may have noticed the stock of Zscaler taking off just after 07:00 am ET on Monday morning, which was when the firm pre-announced certain preliminary unaudited financial results that would beat guidance for its fiscal third quarter that ended April 30th. Zscaler is set to report after the closing bell on Thursday, June 1st.
The firm now expects to have generated fiscal third quarter revenue of $415M to $419M, which is well above the firm's prior guidance of $396M to $398M. Wall Street was looking for a rough $398M. The firm now also sees its adjusted income from operations for the quarter of $60M to $64M, which is above prior guidance of $55M to $56M. Based on the firm's preliminary review, Zscaler also expects to report calculated billings of roughly $478M to $482M. This will be good for a year over year increase of 38% to 39%.
Raising Full Year Guidance
The robust preliminary FQ3 results forced the firm to update full year guidance, even though the firm is already into its fiscal fourth quarter. Zscaler now sees full year revenue at $1.587B to $1.591B, up from previous guidance of $1.558B to $1.563B, taking the low end of the range well above the former high end. The firm also sees calculated billings of $1.97B to $1.974B, up from $1.935B to $1.945B, and adjusted income from operations of $220M to $224M, up from $213M to $215M.
CEO Jay Chaudhry stated in the press release: "I am pleased to announce that our preliminary third quarter results exceeded the high end of our guidance range. We had a strong finish to the quarter as the high ROI of adopting the 'Zscaler Zero Trust Exchange' platform continues to resonate with customers and prospects in this challenging macro environment."
The firm makes clear in the press release that we understand that these results are preliminary... "We are currently in the process of finalizing our full financial results for the quarter ended April 30, 2023 and applying our normal closing procedures and, therefore, the estimated revenues, non-GAAP operating income, and calculated billings presented above reflect various assumptions and estimates based only upon information available to us as of the date hereof. As a result, while we consider the preliminary amounts to be a reasonable estimate, it remains subject to change and actual results may differ."
As for June 1st...
Wall Street has been looking for an adjusted EPS of $0.39 on that $398M that I had mentioned above. Clearly, the community of analysts was on to something. Of the 34 sell-side analysts that I can find (regardless of rating at TipRanks) that cover this stock, 29 have increased their own performance expectations for Zscaler since February. I would expect to hear from a few higher-profile analysts later this morning.
This pre-announcement gets me a little excited. Palo Alto reports on May 23rd. Many consider that name to be best in class. CrowdStrike reports on May 31st and many clients of Zscaler are also clients of CrowdStrike as the two platforms can be used and have been marketed as complementary to each other. In short, I'm thinking that the entire cybersecurity space may be having a better quarter than once feared.
Still, ZS is down 58% over 12 months after having an almost two year run that looks like this...
Readers will see that CRWD has already gone through the process that ZS appears to be embarking on. CRWD is down 35% over the past 12 months. (I am up 25.46% on this one.) PANW is different and is actually up 1% (I'm up 29%) over 12 months, so we'll leave them out of this for now.
The first question now is, does ZS catch up to the competition? The second question would be, has the competition run their course for now? Either way, I will be long cybersecurity through the end of earnings season at a minimum and probably for much longer than that.
So not being long ZS, do I chase today? No, I do not. Being long CRWD, I may... if I can get a sweet enough premium paid, look to write June 2nd $141 calls against that long. I would say that I need $3 in order to pull that trigger. Those calls went out at $1.60 on Friday, but will undoubtedly see a Monday morning increase. $141 is currently the stock's 200 day SMA (simple moving average).
If I were long ZS, this would translate into a potential sale of covered June 2nd $108 calls. The 50 day SMA for ZS is close to $108. These don't trade heavily, and went out on Friday with a last sale of $1.50. I bet they trade heavier today. I would need to see $5+ even to be interested if I were a Zscaler shareholder. Unable to trade options? I would take something off the table this morning up 20%+.