For good reasons, Zscaler (NASDAQ: ZS) popped up at the top of Marketbeat’s Idea Engine list. The company recently reported outperformance that led to a round of analysts' upgrades that have it on track to complete a reversal and rally higher. Based on the technical outlook, the stock could gain an easy $58 and rise another 35% before topping out again.
That target is derived by technical means but is supported by the outlook and analysts.
Zscaler Shows Momentum in FQ4
Zscaler’s FQ4 results confirmed fears of slowing growth but, more importantly, confirmed the company still has momentum and can outpace the consensus. The company reported top and bottom line strength, including 43% revenue growth and wider margins, and also improved the guidance.
The guidance is the telling factor, leading the analysts to raise their estimates. The FQ1 revenue and earnings targets have seen significant upward revisions and may still be too cautious. As it is, analysts expect 34% growth in Q1 and 25% top-line growth next year.
The takeaway from the analyst chatter is that Zscaler is resilient and showing strong momentum. The margins were impressive, and it is a stock to own based on an expectation for the cloud security shift to accelerate over the next 12-18 months.
The company is also expected to sustain outperformance because of a rapidly expanding addressable market and deepening penetration of services.
Marketbeat is tracking 38 analysts with current ratings on Zscaler; nearly 2 dozen of them revised their outlook since the Q4 results were released. Those 24 revisions include 21 boosted targets and 3 reiterated ratings with an average price target above the broad consensus. The consensus has the stock rising about 10.75% to $182.50, the next target for critical technical resistance. The salient point is that the consensus target is trending higher and leading the market.
Assuming the company continues to perform as it has, that trend should continue.
The Institutional Tide is Shifting For Zscaler
The institutions were selling Zscaler earlier in the year and weighing heavily on the price action, but that trend appears to be over. The institutional activity picked up in Q3 and is net bullish, indicating a potential bottom in the market. The institutions own about 46% of the stock, which isn’t much but leaves plenty of shares for them to buy.
The buying is broad and not limited to funds and index-buying, so significant to investors. Assuming the institutions continue to buy this stock on balance, it will provide another tailwind for the market.
The only serious concern with Zscaler's stock price now is the valuation. The stock is trading at nearly 74X the F2024 outlook, and the figures only come down slightly compared to the 2025 outlook. The company will have to maintain a solid double-digit growth pace for the next 4-5 years to grow into a reasonable valuation, and there is risk.
The AI revolution will disrupt many industries, and cybersecurity is in a prime position. The offsetting factor is that Zscaler is already leaning into AI applications and is expected to be a leader over the coming years.
The Technical Outlook: Zscaler Enters Reversal
Zscaler shares hit a bottom earlier this year and have since completed a reversal pattern. That pattern is a Head & Shoulders with a neckline near $158. The market is moving up from that level now and may continue higher. However, the stock will likely retest support at the neckline before moving significantly higher.
In that scenario, confirmed support near $158 would trigger buying because the market appears to be heading higher. The next target for resistance is near $190 and may produce the next buying opportunity when reached. Getting to $216 and 35% gain will depend on the analyst. The freshest targets see the stock trading in a range near $180 to $215 as it is.
