Is Zscaler (NASDAQ: ZS) buyable on this dip? Wedbush analyst Dan Ives thinks so. In his view, the Q4 billings were not a wow number, which is one reason the market is moving lower. Based on the outlook for federal spending and the long-term outlook for cyber-security spending, the pullback is an opportune entry for investors.

He has the stock pegged at Outperform with a price target of $150. "In our opinion, [Zscaler] remains a gold standard cyber name to own, and we would be buyers on weakness for this high quality zero trust growth name going through a near-term uncertain macro."

Of course, Mr. Ives lowered his price target to $150 from $180, along with 5 other major firms. The new consensus is just over $177, which implies a 30% of upside compared to Wedbush’s target of 10% relative to the pre-release price action. The stock is down 10% in premarket trading, so the upside potential is opening up. The problem now is that consensus targets reported by Marketbeat.com are trending lower, and there is no bottom in sight. When this changes, shares of Zscaler can put in a solid bottom, but until then there is a substantial risk the stock could move lower. 

Zscaler Falls Because Growth Slows 

This stock is a highly-valued issue compared to its peers, trading at 98X this year’s earnings and 75X next year’s earnings outlook. Blue-chip peer Palo Alto Networks (NASDAQ: PANW) still produces high-double-digit growth and trades at half that valuation, albeit high relative to the broad market. In this light, it is no wonder that Zscaler shares are under pressure because the growth is slowing significantly and may slow to low-double-digits before it accelerates. The Q2 revenue and earnings were above consensus but only by a small margin. The $387.6 million is up 51.7% compared to last year but was mostly expected, and the guidance is what counts.

Zscaler issued robust guidance for the year and guidance that is above the consensus mark but growth will slow to only 38% YOY because of tougher comps. Earnings are expected to be strong but were not enough of a catalyst in the face of slowing growth and valuation. The guidance of $1.52 to $1.53 is $0.16 better than expected but not worth 98X earnings. 

But, earnings are strong and should not be counted out. The company increased its cash balance over the past 6 months by 9.2% to over $1.9 billion due to top-line strength and a 400 basis point improvement in cash flow and free cash flow margin. This trend should be expected to continue and will set the company up for whatever it needs to do to sustain and/or spur growth. 

"We exceeded both our revenue and profitability guidance in Q2, demonstrating the operating leverage inherent in our business model,” said Jay Chaudhry, Chairman and CEO of Zscaler. “Even in this difficult macroeconomic environment, we continue to see customers consolidate multiple point products onto our integrated Zero Trust security platform for better security and lower cost."

The Technical Outlook: Zscaler Falls Into A Buying Opportunity

Shares of Zscaler are down more than 10% in premarket trading and falling into a buying opportunity. The question is whether or not the market will take advantage of this opportunity. If so, we may see a significant move from the post-release lows that will set the stock up for a Head & Shoulders Reversal. If not, this stock may retest lows near $105 or lower. A move to new lows is not expected, but the possibility should not be completely ruled out.