Zscaler’s share cuts could continue; A bearish selling spread could offset volatility
Cloud security heavyweight investors Zscaler (NASDAQ 🙂 posted strong returns in 2021. Since the start of the year, ZS stock has returned 39.3%. By comparison, the NASDAQ First Trust Cyber Security ETF (NASDAQ 🙂 is up 11.9%. The weighting of the ZS share in CIBR is 3.35%.
On November 19, shares of ZS surpassed $ 376 and hit an all-time high. But since that peak, they’re down about 26%, trading around $ 284. The stock’s 52-week range was $ 157.03 to $ 376.11, and the market cap stands at $ 39.8 billion.
Management released the 2022 financial statements on November 30. Revenue was $ 230.5 million, implying 62% year-over-year growth. Non-GAAP net earnings per share remained stable at 14 cents.
Investors were delighted to see robust revenue growth and management’s outlook for the second quarter was better than analysts’ estimates. For the second quarter, ZS is forecasting total revenue of $ 240 to $ 242 million against a consensus estimate of $ 212.3 million.
CEO Jay Chaudhry said:
“We delivered exceptional results for the first quarter, with year-over-year revenue growth accelerating to 62%. We recently took a major milestone of surpassing $ 1 billion in annual recurring revenue (ARR), and we are now focused on achieving $ 5 billion in ARR.
Prior to the release of quarterly results, ZS stock was trading at around $ 355. The next day it hit an intraday high of $ 373.74. But since then, the bears have taken over. Then came a downgrade of the analysts’ rating on December 6.
Now the shares are hovering around $ 284. Readers should note that on December 20, ZS stock will be added to the index.
What to expect from Zscaler stock
Among 32 analysts surveyed via Investing.com, the ZS stock has a “outperform “.
Analysts also have a 12-month median price target of $ 393.60 on the stock, which implies an increase of more than 40% from current levels. The 12-month price range is currently between $ 286 and $ 500.
However, under a number of valuation models, such as those that might take into account P / E multiples or the 10-year discounted cash flow (DCF) growth output method, the average fair value of the l Zscaler share stands at $ 205.33, implying downside risk. by more than 25%.
In addition, we can look at the company‘s financial health determined by ranking over 100 factors against peers in the information technology industry. In terms of benefit health and relative value, Zscaler scores 1 (lowest score) out of 5 (highest score). Its overall performance is rated as “fair”.
The P / B and P / S ratios for the ZS stock are 74.6x and 51.9x. In comparison, these metrics for peers are 18.9x and 14.5x. In other words, Zscaler stock has a sparkling valuation level.
Finally, readers looking at the technical charts might be interested to know that several ZS stocks‘Short-term indicators are warning investors and suggest that the recent decline may continue in the weeks to come.
We would expect Zscaler’s stock to potentially fall towards $ 250 or even slightly below. In this case, the $ 240 level should serve as support.
After such a potential drop, ZS stocks are expected to trade sideways for several weeks, until they establish a base, perhaps around $ 250, and then start a new stage.
Therefore, Zscaler bulls with a two to three year horizon who are not concerned about short term volatility might consider buying stocks around these levels for long term portfolios. Others, who have experience with options strategies and believe there could be further declines in ZS stocks, might prefer to make a short sell spread.
Most option strategies are is not suitable for most retail investors. Therefore, the following discussion is offered for educational purposes and not as an actual strategy for the average retail investor to follow.
Bear Put Spread on ZS Share
Current price: $ 284.34
In a falling put spread, a trader has a long put option with a higher strike price as well as a short put option with a lower strike price. Both stages of the trade have the same underlying (i.e. Zscaler) and the same expiration date.
The trader wants the ZS share price to drop. However, in a downward selling spread, the potential profit and loss levels are limited. Such a bear put spread is established for a net cost (or net debit), which represents the maximum loss.
Let‘s take a look at this example:
For the first step of this strategy, the trader can buy a put option at the money (ATM) or slightly out of the money (OTM), like the ZS put option January 21, 2022, 270 strikes. This option is currently offered at $ 15.55. It would cost the trader $ 1,555 to own this put option which expires in just under two months.
For the second step of this strategy, the trader sells an OTM put option, like the ZS January 21, 2022 put, 260 strikes. This option‘the current premium is $ 11.85. The options seller would receive $ 1,185, excluding trading commissions.
In our example, the maximum risk will be equal to the cost of the spread plus commissions. Here the net cost of the spread is $ 3.70 ($ 15.55 – $ 11.85 = $ 3.70)
Since each option contract represents 100 shares of the underlying stock, i.e. ZS, we would need to multiply $ 3.70 by 100, which gives us $ 370 as the maximum risk.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless i.e. if the Zscaler stock price at expiration is higher than the price. long put exercise (or $ 270.00 in our example).
Maximum profit potential
In a falling sell spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.
So, in our example, the difference between the strike prices is $ 10 ($ 270 – $ 260 = $ 10). And like us‘I’ve seen above, the net cost of the spread is $ 3.70.
The maximum profit is therefore $ 6.30 ($ 10 – $ 3.70 = $ 6.30) per share less commissions. When we multiply $ 6.30 by 100 stocks, the maximum profit for this options strategy is $ 630.
The trader will realize this maximum profit if the ZS share price is equal to or lower than the short put strike price (lower exercise) at expiration (or $ 260 in our example).
Investors who have traded options in the past are probably aware that short positions are usually awarded on expiration if the stock price is below the strike price (i.e. $ 260 here) . However, there is also the possibility of an early assignment. Therefore, the position would need to be monitored until it expires.
ZS equilibrium price at expiration
Finally, we also need to calculate the breakeven point for this trade. At this price, the trade will neither gain nor lose money.
At expiration, the strike price of the long put (i.e. $ 270 in our example) minus the net premium paid (i.e. $ 3.70 here) would give us the price ZS balance.
In our example: $ 270 – $ 3.70 = $ 266.30 (minus commissions).
Conclusion on Zscaler Actions
We view Zscaler stocks as a solid long-term cybersecurity choice for most retail portfolios. However, from a fundamental valuation level, ZS stocks look expensive.
Additionally, as we wait for updates from the Federal Reserve, there may be further volatility and lower prices. Therefore, a trading strategy as described here might be suitable for traders with a bearish outlook on Zscaler shares.