The Ratings Game: Zscaler stock sheds more than 10% as cybersecurity company has ‘a lot more explaining to do’

Executives told analysts they expected about a 9% sequential decline in quarterly billings, slightly more than the mid-single digit declines of late, citing delays in closing large deals. Citi Research analyst Fatima Boolani said that while “large-deal risk [was] clearly an issue,” the company had “a lot more explaining to do” on results and an outlook that was “objectively disappointing.”

Boolani said that while the large deal pinch was understandable, it was frustrating. Also, the issue of large deal closures is nothing new as the company brought it up last quarter.

While the results and the outlook were difficult to defend, Boolani said that the “still-compelling” medium-term addressable market and “wallet capture” opportunities kept her at a buy rating, while lowering her price target to $145 from a previous $155.

“Appreciating billings growth headwinds stemming from more ramp-based contractual structures are a timing issue,” Boolani said, but added that “weaker bookings performance makes this harder to reconcile in our minds, and where higher profitability on new expense discipline [and 3% workforce reductions] are cold comfort.”

MoffettNathanson analyst Sterling Auty said it was “interesting,” that “Zscaler produced the largest revenue upside surprise in over a year, generating ~52% top line growth in the toughest macro backdrop we have seen for some time,” but the stock was falling because of 34% billings growth.

The analyst, who has an outperform rating on the stock and lowered his price target to $220 from $266, said he believes that “Zscaler has the right product profile for this year’s tough budget environment given the cost-saving nature of its solutions.”

“Add to that a management team that is being disciplined around the pace of investment, in relation to the demand environment, and you get an improving margin / cash flow profile,” Auty said. “Things will all boil down to sales execution, and we believe the revenue growth is a better indicator of how Zscaler is executing, rather than the growth in billings.”

Morgan Stanley downgraded Zscaler and other cybersecurity names in January, writing that “peak” cybersecurity has passed and that investors must get more selective in the sector.

Many cloud-software vendors have said this earnings season that businesses are taking more time to scrutinize deal lengths or subscriptions. Also, new customers are becoming more difficult to come by and many companies have relied on upselling existing customers.

That was the case earlier in the week with identity-management software company Okta Inc.
OKTA,
+5.85%,
which late Wednesday said the bulk of its businesses was in upsells and cross-sells to established customers, and Wall Street said the company was “partially out of the woods.”

Read: Cloud software is a ‘fight for a knife in the mud,’ and Wall Street is souring on the one sector that was winning

Additionally, human-resources cloud-software company Workday Inc.
WDAY,
+1.07%
said earlier in the week it was still on track for growth targets, despite setbacks, and amid concerns that Salesforce Inc.
CRM,
+0.45%
was losing its mojo, the customer-relationship management software giant won the Street back in an earnings report, that promised profit growth, giving the stock its biggest boost since 2020.

Of the 41 analysts who cover Zscaler, 29 have buy grade ratings and 12 have hold ratings, according to FactSet Data. Of those 20 lowered their price targets, while one raised theirs, resulting in an average target price of $160.37, down from a previous $168.98.

Zscaler’s stock is down 50% over the past 12 months, compared with a 7.5% loss by the S&P 500 index 
SPX,
+1.47%,
a 14% decline by the tech-heavy Nasdaq Composite Index
COMP,
+1.88%,
and an 18% drop on the ETFMG Prime Cyber Security ETF 
HACK,
+0.96%.