Company Review: Zscaler Inc. (ZS)
Zscaler (ZS) reported a beat on revenues, earnings, and forward guidance last night. The company reported revenue growth of 46%. And provided guidance for revenue growth of 41% for the next quarter.
Gross margins ticked down from 79.9% to 75.1%. R&D spending increased from 20% of revenues to 26% of revenues. And SG&A expenses also increased from 69% of revenues to 85% of revenues. Operating margins deteriorated from -9% to -36% for the quarter.
The stock has barely moved since reporting. Like most of the tech sector, it’s had a tremendous run off the March lows ($35 to $163). ZS has fallen about 20% during this recent Nasdaq correction and now sits around the 50 day moving average support.
The average decline in the stock since it IPO’d in 2018 is approximately 42%.
If support in the $120 range fails to hold, look for potential support in the $90-$95 range.
Overall there was a lot to like about the report. The run-up has pulled forward a lot of this good news already though. The increase in operating expenses is just the cost of doing business in that industry and trying to establish some sort of competitive barriers. The tick down in gross margins is a little concerning, but nothing that would change my mind.
Disclosure: Long ZS
Disclosure: None.
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