Why Did Zscaler Stock Climb 13% in June?

The cybersecurity stock’s quarterly results helped build optimism about the industry’s health.

Shares of Zscaler (ZS -0.01%) rose 13.1% last month, according to data provided by S&P Global Market Intelligence. The company posted an impressive quarterly earnings report to start the month. Then the stock continued to move higher, thanks to momentum among cybersecurity stocks driven by additional promising data from members of the company’s peer group.

Bullish quarterly earnings report kicked off the month

Zscaler released financial results for its fiscal third quarter on May 30, and investors loved what they saw. The company’s revenue grew 32% over the prior year, topping Wall Street’s forecasts by $17 million.

Zscaler’s adjusted net income nearly doubled relative to the prior year, and its non-GAAP earnings per share were 33% higher than consensus analyst expectations. The profit expansion allowed the company to produce nearly $125 million of free cash flow during the quarter.

A computer screen with data displays and an alert that the system has been hacked.

Image source: Getty Images.

The impressive performance extended beyond those impressive headline numbers. Zscaler’s billings grew 30%, prompting the company to increase its full-year sales forecast. Its 32% growth rate and 22% free-cash-flow margin combined to form an important bullish metric.

Software businesses often employ the Rule of 40, which suggests that 40% is an essential benchmark. If you add a company’s annual growth rate to its profit margin, then anything above 40% is acceptable.  Zscaler’s latest results are well above that threshold.

Its 116% net dollar retention rate is also encouraging. Among customers that were active one year ago, the cybersecurity company is generating 16% more revenue than they were at the start of this 12-month period. Zscaler is retaining a large percentage of its customers and also upselling existing relationships.

The latest quarterly results were evidence of strong sales activities, efficient corporate operations, and a high-quality product delivering customer satisfaction.

Momentum across the cybersecurity industry

Zscaler’s strong quarter helped boost investor confidence in demand for cybersecurity software. That evidence was corroborated by impressive quarterly reports from some of its industry peers.

SentinelOne topped analyst estimates on May 30 with 40% revenue growth. CrowdStrike‘s June 4 earnings release exceeded Wall Street’s forecasts for both sales and earnings by delivering 33% growth, expanding profit margins, and revising its forward-looking guidance higher.

Investors saw a pattern forming. Looking at the price charts for the above stocks, along with Cloudflare and Palo Alto Networks, reveals common price drivers across the group.

CRWD Chart

Data by YCharts.

Investors have been worried about macroeconomic headwinds slowing growth in the red-hot cybersecurity sector, but recent financial results from Zscaler and its peers turned June into a bullish month. Zscaler’s price-to-sales ratio is nearly 15 and its forward price-to-earnings ratio is above 60.

Those are both fairly expensive based on optimistic growth expectations. The stock could experience volatility, thanks to discouraging macroeconomic news or quarterly results.

Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, CrowdStrike, Palo Alto Networks, and Zscaler. The Motley Fool has a disclosure policy.

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