Zscaler initiated at Neutral following its recent outperformance: B. Riley

[Zscaler HQ campus building in Silicon Valley]
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Zscaler (NASDAQ:ZS [https://seekingalpha.com/symbol/ZS]) received a Neutral rating as B. Riley Securities initiated coverage, which noted that although the cybersecurity firm has recently outperformed its peers, investors should wait before buying.

B. Riley also set a $275 price target on the stock.

"We calculate that ZS trades at an earnings multiple that is approximately in line with our universe of comparable cybersecurity leaders on absolute and adjusted bases, after adjusting for earnings growth," said B. Riley analyst Erik Suppiger, in an investor note. "Accordingly, we believe investors should wait for a pullback in ZS, for greater visibility into the competitive landscape, or for additional catalysts such as validation of Zscaler's AI technologies or other new products."

Zscaler was one of the first to target the Secure Service Edge market, which is currently replacing remote access on a large scale. The widespread adoption of artificial intelligence applications is also beneficial for Zscaler's Zero Trust platform, Suppiger noted.

"For FY25 (July), we estimate that Zscaler will generate 23% Y/Y ARR growth and 26% FCF margins, translating into a score of 49 for the Rule of 40," Suppiger said. "Zscaler also has high visibility with RPO of $5B and SaaS subscriptions generating 100% of its revenue."

However, Zscaler also operates in a highly competitive landscape and already has a high valuation, about 55x the CY27 earnings estimate, which prompts the Neutral rating.

Zscaler plans to release its fourth quarter fiscal 2025 financial results post-market on Tuesday, Sept. 2. A consensus estimate [https://seekingalpha.com/symbol/ZS/earnings] expects adjusted earnings per share of $0.80 on revenue of $707.14M.

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