What Happened?
Shares of cloud security platform Zscaler (NASDAQ:ZS) jumped 7.2% in the morning session as the debate around the future of AI continues following the unveiling of DeepSeek. The market is recalibrating and rotating to stocks that are not only more insulated if DeepSeek prevails in the AI arms race but to stocks that may actually benefit no matter who wins that race. The proliferation of AI will be a general tailwind to demand for cybersecurity, big data, and automation software.
For example, AI can make bad actors better and make the search for vulnerabilities faster. This means that enterprises will need more of what CrowdStrike, Zscaler or Cloudflare offer. Additionally, more data is only valuable if the mountains of numbers, text, and videos can lead to actionable insights. AI can do exactly that, meaning that enterprises will get more value from platforms like Snowflake and MongoDB. Similarly, AI can make automation software more valuable by making it more adaptive, which means that customers can extract more platforms from platforms like ServiceNow and Appian.
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What The Market Is Telling Us
Zscaler’s shares are not very volatile and have only had 9 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 5 months ago when the stock dropped 17.8% on the news that the company reported weak second-quarter earnings results. Its billings guidance for the next year was slightly below expectations, and furthermore, suggests an acceleration in growth throughout the year. Management specifically detailed "year-over-year billings growth of approximately 13% in the first half, accelerating to 23% growth in the second half." This made the market quite uncomfortable.
On the other hand, Zscaler beat analysts' billings, revenue, and operating income expectations this quarter. Zooming out, we think this was a solid quarter featuring some areas of strength, but the outlook seems to be weighing on shares.
Zscaler is up 11.8% since the beginning of the year, but at $203.10 per share, it is still trading 20.3% 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 $3,595.
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