"AI big cow stock" triggers industry concerns, Zscaler (ZS.US) post-earnings guidance revision also falls 8%

The stock price of the cybersecurity company Zscaler (ZS.US) fell by 8.38% in after-hours trading on Thursday, to $221.7, despite the company achieving quarterly profit against a backdrop of strong product demand. Zscaler reported an adjusted earnings per share of 76 cents and revenue of $525 million in the second quarter of 2024, representing year-over-year increases of 106% and 35.4%, respectively. Analysts had previously expected earnings per share of 58 cents and revenue of $506.83 million. Key revenue metrics showed a 27% year-over-year increase in cumulative orders, reaching $627.6 million, higher than the expected $610.5 million; deferred revenue increased by 35% to reach $1.5 billion. Zscaler's CEO Jay Chaudhry stated in a release, "Our second quarter performance was strong as customer interest in the Zscaler Zero Trust Exchange platform remains high, with billings, revenue, and operating profits all exceeding our expectations." The executive referred to the new cloud security solution announced by the company last month. According to the company, this solution is built on a new architecture where business strategy dictates user and device access, rather than traditional network and firewall architectures. Chaudhry added, "More and more customers are realizing the shortcomings of traditional firewall security and are partnering with us to transform their traditional security into a Zero Trust architecture." In terms of guidance, Zscaler currently expects annual revenue for the fiscal year 2024 to be approximately $21.18 billion to $21.22 billion, up from previous estimates of $20.9 billion to $21.1 billion, with a consensus expectation of $21.1 billion; the forecast for total annual orders is expected to increase from a range of $25.2 billion to $25.6 billion to $25.5 billion to $25.7 billion. Adjusted earnings per share are currently forecasted to be $2.73 to $2.77, up from previous estimates of $2.45 to $2.48, with a consensus expectation of $2.48. For the third quarter, Zscaler expects adjusted earnings per share of 64 to 65 cents and revenue of $5.34 billion to $5.36 billion, with analysts predicting earnings of 59 cents per share and revenue of $5.3087 billion. "Palo Alto Networks (PANW.US) Downgrade Triggers Industry Sell-off" Statistics show that following a surge of over 110% in 2023, the stock price of one of the "AI Big Bull Stocks" in the US, Palo Alto Networks, has risen by 24% year-to-date, as investors anticipate continued growth in global enterprise investments in cybersecurity and the increasing integration of AI technology into the field by Palo Alto, leading to a rise in valuation due to the ongoing global AI investment frenzy. Palo Alto, focused on incorporating AI technology into cybersecurity, is considered one of the biggest winners in the global stock market around the AI investment frenzy. However, the downward revision of performance outlook by Palo Alto Networks undoubtedly dampened market sentiment; this indicates that even with the recent surge in cyberattacks, customers may reduce their tech spending targets and curb their consumption ambitions. The latest growth expectation for Palo Alto Networks' total revenue for the fiscal year is at most 16%, far below the year-over-year growth rate of over 25% in recent years. Palo Alto Networks' downgrade in total revenue forecast for fiscal year 2024 has put severe pressure on other cybersecurity companies like CrowdStrike Holdings Inc. (CRWD.US) and Zscaler in after-hours trading. In contrast, Zscaler's stock price has risen by over 26% since the last quarter's report. Expectations for today's performance are also high, especially considering the unexpected change in strategy by the larger competitor Palo Alto Networks, which released disappointing performance guidance. This has brought more scrutiny to the entire cybersecurity industry and sparked a sell-off. Investors may also be disappointed by the consecutive quarters of slowing revenue indicators for Zscaler. The company saw a 40% increase in revenue in the first quarter, with cumulative orders up by 34% and deferred revenue growing by 39%.