Should You Buy Zscaler Stock Before Sept. 3?

It's been a wild ride for Zscaler (NASDAQ: ZS) investors so far in 2024. While shares of the zero-trust cloud cybersecurity innovator gained more than 40% over the past year, they are also down by about 25% from their 52-week high.

There's plenty of enthusiasm about the growth potential from the company's initiatives integrating artificial intelligence (AI) across its platform. On the other hand, the stock carries a lofty valuation in an intensely competitive industry.

The company's fiscal fourth-quarter earnings report, scheduled to be released on Sept. 3, could reaffirm a positive long-term outlook. Should investors buy shares of Zscaler now or take a wait-and-see approach?

AI-powered cybersecurity

Zscaler's Zero Trust Exchange has gained market adoption as an alternative to legacy cybersecurity solutions. The zero-trust architecture assumes that no data or communication is inherently safe, in contrast to traditional firewalls that natively trust everything within a network's perimeter.

Several high-profile security breaches exploiting firewall vulnerabilities have driven organizations to implement Zscaler's more robust cloud-based platform. The company believes it operates within a $72 billion addressable market, with the recent launch of multiple new applications including Risk360 and Unified Vulnerability Management expanding on its opportunities.

The company is leveraging AI to enhance the platform's capabilities. The GenAI App and its AI Copilot utilize machine learning and automation to monitor and respond to security threats proactively. Maybe the biggest development this year was Zscaler's acquisition of Avalor, which bolstered Zscaler's AI leadership while giving it entry into security-centric enterprise data management. Overall, there's a lot to like about Zscaler in what may still be the early stages of a significant expansion.

Image source: Zscaler.

What to expect from Zscaler's next quarterly report

The market hopes to see the continuation of the company's recent operating and financial momentum in the upcoming fiscal Q4 earnings report.

Management has guided for revenue growth of between 24% and 25%, with an earnings per share (EPS) forecast of $0.69 to $0.70. For the full year, the EPS target of around $3.00 represents a 68% increase from the $1.79 result in fiscal 2023. This ramp-up in profitability has been a major theme for Zscaler, which has been generating sharply higher operating margins as its business scales.

Beyond the headline numbers, the market will be focused on key performance indicators. The metric that stood out last quarter was its 116% dollar-net-retention ratio, which suggests that the company's existing customers are increasing their spending on the platform by adding features or accepting higher pricing. Zscaler now has 523 accounts generating more than $1 million in annual recurring revenue (ARR), up 31% over the past year.

This dynamic of onboarding larger organizations and building on those relationships offers good evidence that Zscaler's innovations are resonating in the market. Investors will be hoping that the Q4 update confirms that Zscaler is progressing toward its goal of $5 billion in ARR, more than double the size of the business currently. That multiyear road map is a big part of the bull case for the stock.

Is Zscaler a buy now?

I'm bullish on Zscaler, based on its success in becoming sustainably profitable and its emerging AI leadership. At the same time, these earnings reports are high-risk events for investors, particularly as expectations for the company are already high.

Zscaler is trading at 66 times management's 2024 forecast EPS. I believe that earnings premium is justified given the company's growth outlook, but it also warrants caution, as it leaves little margin of error in a scenario where results disappoint.

I expect Zscaler's results to match estimates this quarter, although that may not be enough to spark a big immediate rally in the stock. The prudent move would be for investors to wait until after the report to open new positions in the stock, though current shareholders should stay the course. Management's guidance will set the tone for the shares into the company's fiscal 2025.

Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zscaler. The Motley Fool has a disclosure policy .