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Bull Of The Day: Zscaler (ZS)

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Zscaler (ZS - Free Report) is a Zacks Rank #1 (Strong Buy) and it is the Bull of the Day today. I picked this stock in part because of the growth divergence that I always look for.  What growth divergence you might ask?  Well when I see a strong Zacks Style Score for Growth (B for ZS) and a weak Zacks Style Score for Value (F for ZS) then I know I am on the right path.

Value investors and growth investors are inherently seeking different things so when the style scores are far apart, I know that growth investors will favor a stock like ZS.

Description

Zscaler Inc. operates as a cloud security company. It focuses on transforming networks and applications for a mobile and cloud-first. The company's flagship services consist of Zscaler Internet Access and Zscaler Private Access engages on securing connections between users and applications, regardless of device, location or network. Zscaler Inc. is headquartered in San Jose, California.

Earnings History

The Zacks Rank looks at the earnings history for all stocks, but it is not the most heavily weighted factor in determining what the final Rank is.

That said, ZS has a wonderful earnings history with 4 beats in the last four quarters.  These are also very big beats, with the average positive earnings surprise coming in at 312% over the last year.

Estimates

The Zacks Rank tends to focus on the earnings estimate revisions, and ZS has seen growth in estimates while many stocks have seen contractions.  COVID has put a hurt on many estimates but ZS continues to see estimates trend higher.  

I see the 2020 fiscal year estimate coming in at $0.17 and that is two cents than where it was 60 days ago.  

The estimate for next fiscal year is $0.24 and it too is two cents higher than were it was 60 days ago.

Valuation

Growth investors tend to pay up for stocks as they are generally already seeing multiple expansion.  I don't know how else to justify a 630x forward PE or a 42x price to book multiple.  That said, nearly 40% topline growth is not something that is very commonplace so a 36x price to sales multiple is almost justifiable.  I see margins moving the wrong way over the last three quarters so as that problem gets fixes the valuation multiples will probably become more reasonable.

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