Up 96% over the past 12 months, and up around 40% year-to-date, has the ship sailed with Zscaler (NASDAQ:) stock? Not necessarily. 

Shares in cloud security shares will likely only see modest gains over the near-term, despite their extraordinary run. That does not mean it’s ceasing to be a growth story as post-COVID recovery unfolds.

In the U.S., and in other large economies, it may seem that there is no lockdown. But, remote work will continue to grow in popularity.

This secure web gateway provider is sure to continue reaping the benefits of a growing hybrid office environment. New opportunities exist, which will allow the company to expand its growth potential. 

That said, growth is not the only thing that’s running high. As is valuation. Bullish. (See ZS stock charts on TipRanks)

ZS Stock: Continuing to Grow after Reopenings

As its most recent quarterly results show, the “return to normal” following last year’s pandemic lockdowns hasn’t resulted in much of a slowdown in Zscaler’s growth.

Year-over year, revenue for the quarter that ended on July 31st 2021 increased 57%. Billings rose 70% compared to the previous year. Also, adjusted earnings per shares for ZS stock increased sharply. Year-over-year, earnings per share (EPS), increased from $0.08 cent to $0.14 cents.

The company is still in high demand and looking to expand its market share. It will continue to see higher rates of earnings and revenue growth over the next few years.

This is evidently more than the rich valuation suggests. While this could weigh on the stock in the near-term, investors looking at this as a long-term play shouldn’t view this as a deal breaker.

Valuation Concerns May Be Overblown

ZM has a premium valuation, with a forward price-to-sales, or P/S, ratio of 38.7x, and forward price-to-earnings, or P/E, ratio of 492.7x. This may not cause concern.

Zscaler’s first move is to increase its level of service. Zscaler is looking to expand its reach among large enterprise customers. The company also plans to expand its endpoint security business and into other areas such as cloud app security.

It is expected that its operating margins will see a significant improvement as the company scales up. In the next three-year period, adjusted operating margins may rise to 20-22%.

Keep in mind though, this doesn’t mean shares are about to see another major jump in price. This could lead to more modest gains. It is possible that there will be a short-term drop in stock price.

What Analysts are Saying About ZS Stock

According to TipRanks, ZS stock has a consensus rating of Moderate Buy. From 23 analyst ratings it has received, 16 rate it Buy and 7 rate it Hold.

There is 13.3% upside potential for ZS prices to reach $309.43 an share. The price targets of analysts range from $225 to $345 per share.

Bottom Line

Zscaler’s valuation today may be rich. Yet, with its strong position in the secure web gateway space, and exposure to the corporate world’s increasing cybersecurity needs, it may be worth the price.

Disclosure: Thomas Niel didn’t hold any positions in the securities discussed in this article at the time it was published.

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