Zscaler (ZS) recently made it onto Zacks.com's list of Most Searched Stocks, therefore, it may be advisable to consider some key factors that could impact this stock's performance in the near future.
Shares of this cloud-based information security provider have risen +11.6% over the past month compared to a +3.2% gain for the Zacks S&P 500 Composite Index. The Zacks Internet – Services industry, which Zscaler belongs to, has lost 0.1% in that period. The big question here is, where is this stock headed in the near term?
While media reports or rumors of major changes in a company's business prospects usually influence the movement of that company's share price, leading to immediate price movements, there are always certain fundamental factors that ultimately drive a buy-and-hold decision.
Earnings forecast revision
At Zacks, we evaluate changes in a company's future earnings estimates above all else because we believe the present value of future earnings streams determines the fair value of a stock.
Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings forecasts in light of the latest business trends. When a company's earnings forecast goes up, the fair value of its stock also goes up. And if a stock's fair value is higher than its current market price, investors are more inclined to buy the stock, resulting in an increase in its share price. For this reason, empirical research shows a strong correlation between trends in earnings forecast revisions and short-term stock price movements.
For the current quarter, Zscaler is projected to post earnings of $0.69 per share, which would represent a +7.8% change from the year-ago period. The Zacks Consensus Estimate has remained unchanged within the past 30 days.
The consensus earnings estimate for the current fiscal year is $3.01, indicating a change of +68.2% year over year. This estimate has not changed in the past 30 days.
Looking at the next fiscal year, the consensus revenue estimate is $3.27, which represents a +8.7% change from what Zscaler was expected to report a year ago, with estimates unchanged over the past month.
The Zacks Rank, our proprietary stock rating tool with a strong outside-audited track record, effectively harnesses the power of earnings estimate revisions to provide a more certainty view into near-term stock price direction. The magnitude of the recent change in consensus estimates, along with three other factors related to earnings estimates, have earned Zscaler a Zacks Rank #3 (Hold).
The story continues
The chart below shows the evolution of the company's consensus EPS estimates over the next 12 months.
12 Month EPS
Revenue Growth Forecast
A company's earnings growth is arguably the best indicator of a company's financial health, but nothing happens if the company can't grow earnings. It's nearly impossible for a company to grow its earnings without growing its revenue over the long term. Therefore, knowing a company's earnings growth potential is very important.
For Zscaler, the revenue consensus estimate for the current quarter is $567.62 million, indicating a change of +24.8% year-over-year. Estimates for the current and next fiscal years are $2.14 billion and $2.6 billion, indicating changes of +32.5% and +21.5%, respectively.
Last reported results and surprise history
Zscaler reported revenue of $553.2 million in the most recent quarter, up 32.1% from the same period last year. EPS for the quarter was $0.88, up from $0.48 in the same period last year.
Compared to the Zacks Consensus Estimate of $535.55 million, reported revenues represented a surprise of +3.3%. EPS surprise was +35.38%.
The company has beaten consensus EPS estimates in each of the last four quarters, and revenue also beat consensus estimates in each quarter during that period.
evaluation
No investment decision can be made efficiently without taking into account stock valuation. Whether a stock's current price properly reflects the intrinsic value of its business and the company's growth prospects is a key factor in determining future stock price movements.
Comparing the current value of a company's valuation multiples such as Price to Earnings (P/E), Price to Sales (P/S) and Price to Cash Flow (P/CF) with the company's historical values helps in determining whether the stock is fairly valued, overvalued or undervalued, while comparing a company with its peers on the basis of these parameters gives a good sense of the fairness of the stock's valuation.
The Zacks Value Style Score, a part of the Zacks Style Scores system, evaluates both traditional and non-traditional metrics, categorizes stocks into five groupings from A to F (A is better than B, B is better than C, etc.) to help identify whether stocks are overvalued, fairly valued or temporarily undervalued.
Zscaler is rated an F on this front, indicating that it is trading at a premium relative to its peers. Click here to see the values of some of the valuation metrics that drove this rating.
Conclusion
The facts discussed here, and many other information on Zacks.com, may help you decide whether the market buzz around Zscaler is worth following, although its Zacks Rank #3 suggests it may be capable of performing in line with the broader market in the near term.
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