Zscaler 'growth drivers show signs of improvement': BofA

Investing.com -- Bank of America has upgraded Zscaler (NASDAQ: ZS) to a Buy rating from Neural, citing strong growth in upsell capabilities and a solid financial performance.

The firm raised its price objective from $215 to $240, noting that Zscaler's "growth drivers show signs of improvement" with accelerating order growth and a strengthening product portfolio.

Zscaler reported an 18% year-over-year increase in billings and a 23% rise in revenue, both exceeding Wall Street expectations.

Operating margin improved by 30 basis points sequentially, while free cash flow margin came in at 22%, benefiting from strong top-line results.

BofA highlighted "a strengthening portfolio, especially on zero-trust and data initiatives, and ramp in sales productivity" as key positives supporting the stock's outlook.

The company has also started disclosing annual recurring revenue (ARR), which rose 23% year-over-year. First-half billings grew 16%, and management indicated that billings growth could reach 25% by the fourth quarter.

Notably, "sales contribution from new customers is one of the highest among cyber peers, at about 33% of the growth," while net revenue retention has improved to 115%, addressing a prior concern.

Emerging products continue to gain traction, with data security revenue up 40% year-over-year. Zscaler’s Zero Trust portfolio, which offers alternatives to traditional firewall architectures, is also resonating with new customers, as "57% of its new branch connector customers were new customers."

Despite the positive outlook, BofA flagged two key risks: competition in Zscaler’s core ZIA and ZPA products, which still account for 80% of revenue, and the need for execution on its ambitious second-half billings growth targets.

However, with strong visibility in scheduled billings and improving sales efficiency, BofA believes Zscaler is well-positioned for continued growth.

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