Why Zscaler's stock just got a downgrade after its 31% pop off recent lows

By Emily Bary

Mizuho worries about rising competition and changes to the company's sales team

Zscaler Inc. shares have taken investors on a ride this year, as they're up 31% from their late-May lows but still off about 4% over the course of 2024.

Mizuho analyst Gregg Moskowitz recommends that investors take pause for now, in light of the cybersecurity stock's "material" rebound.

He noted that the company has been a strong executor even in tough macroeconomic conditions, and it has a strong positioning in the market for secure access service edge offerings.

"That said, we're not confident that [Zscaler] can continue to close large, transformative deals at a steady pace, particularly given the macro environment coupled with what we believe is an increasingly competitive SASE market," he wrote.

Moskowitz cut his rating on the shares to neutral from outperform on Tuesday, while keeping his $220 price target. The stock is down 1.5% in premarket trading Tuesday.

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He's concerned about the prospect of "meaningful risk to execution" stemming from leadership changes and other turnover within Zscaler's sales team: "It's important to note that our recent checks have not indicated any real disruption to [Zscaler's] business, although we worry that this could change" in the first half of fiscal 2025.

There is also growing competition in the market for SASE offerings, "mostly from incumbents, although newer market entrants are adding to the noise," Moskowitz said.

While he thinks Zscaler's management has taken a "prudent" approach to its fiscal 2025 commentary thus far, without giving traditional guidance, Moskowitz wonders how likely it is that the company will end up exceeding Wall Street's targets.

"In our view, consensus estimates for 20% billings growth next year are very achievable, although we believe meaningful fundamental upside is likely needed to drive the shares significantly higher from here, and we have our doubts in that regard," he said.

Of the 42 analysts tracked by FactSet who cover Zscaler shares, 33 rate them the equivalent of buy and nine rate them the equivalent of neutral.

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-Emily Bary

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07-16-24 0831ET

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