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September 01, 2020 1:26pm
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Bargain Alert: Zscaler Stock and The Case For A 70% Rally

Zscaler logo on HQ campus building in Silicon Valley. Zscaler is a global cloud-based information security company - San Jose, CA, USA - 2020

Though they popped 15% in the immediate aftermath of last week's earnings, shares of Zscaler Inc. (NASDAQ: ZS) have been quickly retracing their steps. The fact they're only marginally above the level where they were trading going into last week's fiscal Q3 release will be frustrating for investors, especially as the results were good. 

The cyber-security giant managed to beat analyst expectations for both headline numbers, posting, for example, non-GAAP EPS of $0.88, which was 35% higher than the consensus. It was a similar story with revenue, which delivered a healthy beat while showing year-over-year growth of 32%. 

Strong Outlook for Zscaler

The good news didn't stop there either. Take Zscaler's forward guidance, for example. For the quarter ahead, they're now looking for revenue of $565 million to $567 million, against a consensus of $565 million. Management's guidance on non-GAAP net income per share also came in hot. 

They're also taking definitive steps to maintain this momentum in the quarters ahead. As Zscaler CEO Jay Chaudhry said with the release, to meet the market demand, Zscaler is "accelerating innovation, expanding our platform, and building a strong go-to-market team to scale our business to $5 billion and beyond in ARR."

It was immediately clear from the Wall Street analysts that they were also buying into this bullish outlook. In the aftermath of last week's report,  the team at Barclays reiterated their Buy rating while boosting their price target on Zscaler shares up to $210. Royal Bank of Canada did the same, only with a fresh $230 price target, while JMP Securities went even further with their reiterated Outperform rating and a $270 price target. 

Zscaler's Bullish Analyst Coverage

With all this in mind, it's completely understandable that Zscaler stock would pop like it did. In fact, given that shares had fallen as much as 40% from February's peak, it's a wonder they haven't held onto their gains, let alone added to them, in the days since. 

It's worth noting that compared to many other well-covered stocks, Zscaler's analyst coverage is far from consistent. While those mentioned above were all very much in the bullish camp, Loop Capital reiterated its Hold rating, and JPMorgan reiterated its Neutral rating. 

But even then, their respective price targets of $180 and $205 are both well ahead of the $170 Zscaler was trading at during Monday's session. This all points to a heavily undervalued stock that is being temporarily held back while almost all of Wall Street is screaming for it to rally. The increased price target from Needham & Co, for example, at $290, is pointing to an upside of some 70%!

Getting Involved in Zscaler Stock

This kind of potential isn't likely to be ignored for much longer. Common themes on the strength of Zscaler's outlook included "its unique cloud proxy security architecture, which should enable it to thrive in an increasingly digital-enabled world," along with "a number of drivers to sustain at least 20%+ growth and margin expansion" in the coming years. 

For those of us on the sidelines who are tempted to get involved and take advantage of what feels like a temporarily mispriced stock, look for shares to stabilize through the rest of the week. It's critical they don't trend back down towards their pre-earnings price of $155, as this would suggest the real money isn't buying the optimism, but if they can hold the $170 line instead, things should get interesting. A relative strength index (RSI) reading of 44 means they have a ton of room to run once they get going, with very little resistance in the way until they're well above $200.

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