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Why Shares of Zscaler Crashed Today

What happened

Shares of Zscaler (NASDAQ: ZS) tumbled on Wednesday after the cloud security software company reported its fiscal fourth-quarter results. While Zscaler beat expectations, the combination of lackluster guidance and a sky-high valuation led to a brutal sell-off. The stock was down a whopping 23% at 12:15 p.m. EDT.

So what

Zscaler reported fourth-quarter revenue of $86.1 million, up 53% year over year and about $3.3 million higher than the average analyst estimate. Non-GAAP (adjusted) earning per share came in at $0.07, beating analyst expectations by $0.05.

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Zscaler's guidance was the problem. The company expects fiscal 2020 revenue between $395 million and $405 million, representing a growth rate of just 32%. That's down from a growth rate of 59% in fiscal 2019.

That revenue outlook was actually in line with analyst expectations, but the company's earnings outlook was not. Zscaler expects non-GAAP EPS between $0.12 and $0.15 for the full year, down from fiscal 2019 and well short of the $0.20 analysts were expecting.

Now what

Shares of Zscaler have fallen off a cliff since peaking in late July. Including Wednesday's rout, the stock has shed about 46% of its value in just a couple of months.

The pain could just be getting started, because Zscaler stock remains obscenely expensive. Shares were trading for nearly 40 times trailing sales in July; that ratio has now been nearly cut in half but is still deep into nosebleed territory.

Zscaler may very well be a great company, but even the best company at too high a price can be a terrible investment. As Zscaler's growth slows, the stock's stratospheric valuation is facing a reckoning.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zscaler, Inc. The Motley Fool has a disclosure policy.


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