Stock Story -
What Happened: Shares of cloud security platform Zscaler (NASDAQ:ZS) jumped 5.5% in the afternoon session after cybersecurity software provider and peer BlackBerry (TSX:BB) reported Q1'25 earnings results. Since the company reports off-cycle, there is likely some extra attention being paid to it given the lack of other peer datapoints. Specifically, BlackBerry reported revenue ahead of expectations, with sales partly benefitting from strong cybersecurity revenue, which beat consensus estimates.
Notably, BlackBerry observed some improvements in key growth indicators, including net retention rate and annual recurring revenue. The results likely point to a more resilient demand for cybersecurity solutions.
The positive sentiment shared during BB's earnings call and encouraging growth indicators called out during the quarter are a significant improvement compared to some choppier trends observed by enterprise software vendor Palo Alto Networks during last earnings season. Palo Alto's recent earnings results had been negatively impacted by multiple factors that affected billings and revenue growth, including weakness in the U.S. federal vertical and customers' conservativeness regarding upfront cash payments.
Overall, given the general SaaS skepticism in the last few months, this is evidence that cybersecurity, in particular, is holding up quite well.
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What is the market telling us: Zscaler's shares are very volatile and over the last year have had 13 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 4 months ago, when the stock dropped 15.5% as cybersecurity stocks fell after industry stalwart, Palo Alto Networks reported fourth-quarter results and lowered full-year guidance for revenue and billings, with both metrics also falling below Wall Street's expectations. This is never a good sign. Furthermore, billings and revenue guidance for next quarter also missed Wall Street's estimates, with EPS below as well.
Palo Alto Networks highlighted many challenges during the quarter, including 1.) weakness in the U.S. federal vertical, which impacted billings and revenue growth, and 2) Customers' conservativeness regarding upfront cash payments. The long-term demand forecast provided was also concerning as management highlighted the possibility of "a period of 12 to 18 months of pressure on our top-line growth rates, notably billings."
In addition, the top-line growth metrics are expected to be impacted by the company's shift towards a "platformization" strategy, which will make it easier for customers to consolidate their usage of cybersecurity solutions and provide the possibility of accessing some products for free in the early adoption phase. Under this strategy, Palo Alto Networks noted that a typical customer adopting the platform " will not pay us for our technology for a period of time. As these programs ramp over the next year, we expect a change to our billings and revenue growth for the next 12 to 18 months." This strategy may drive more competition within the cybersecurity space as industry players adjust their pricing/product strategies to stay competitive.
Overall, this was a weaker quarter for Palo Alto Networks, with the poor guidance highlighting several issues within the business as well as potential challenges for cybersecurity players.
Zscaler is down 10.9% since the beginning of the year, and at $189.55 per share it is trading 25.6% below its 52-week high of $254.93 from February 2024. Investors who bought $1,000 worth of Zscaler's shares 5 years ago would now be looking at an investment worth $2,440.
