tech
Cybersecurity stocks are surging. One looks promising into earnings
Mike Khouw is long Zscaler into earnings after the close.
TL;DR
- Zscaler is showing signs of a bearish-to-bullish stock reversal.
- Options are not cheap due to a high implied move compared to the long-term average.
- A call spread risk reversal strategy is proposed to gain bullish exposure with limited premium outlay.
- The company boasts strong revenue growth (26% YoY), significant free cash flow margins (~27%), and a clean balance sheet (~$1.7 billion net cash).
- Zscaler's Zero Trust Exchange platform is structurally positioned to benefit from the increasing need for AI security.
- The AI agent exposure is seen as an under-appreciated catalyst, with every new AI workload requiring inspection and security.
- Potential risks include decelerating net retention, hyperscaler competition, macro headwinds, and unmonetized AI features.
- The upcoming earnings report is important as the street expects reported profits, and the stock has already recovered significantly on this expectation.