Cybersecurity stocks are surging. One looks promising into earnings
Zscaler Reports after closing. I’m long on the stock, which appears to be in the middle of a bearish-to-bullish reversal but without a long-term premium (options).
Options aren’t cheap, with an implied move of 12.2% versus the long-term average of 11.3%.
I want to be relatively clear fixed premium with uptrend/sentiment (aka “delta”). Flipping the exposure on a call spread, selling an out-of-the-money put and using the proceeds to purchase a call spread gives me long-term exposure, little to no premium expense, and slightly less risk than buying the stock outright if earnings are not well covered. Selling the downside will tie up cash, but no more than buying the stock.
Revenues are up 26% year-over-year, trailing 12-month revenues are expected to reach $3.32 billion, and free cash flow margins are running around 27%. With NTM free cash flow of around $1 billion and expected FCF growth of around 24% annually, it could become a cash compounding machine, and net cash of $1.7 billion means there are no landmines lurking on the balance sheet. The Zero Trust Exchange platform is the cornerstone of AI security, and that’s architecture, not marketing language. Where every enterprise AI agent needs a secure, auditable way to reach cloud resources, Zscaler’s inline proxy model is structurally positioned in a way that legacy firewall vendors cannot replicate. Palo Alto and Fortinet are adapting on-premises mindsets to a cloud-native challenge. ZS was born in the cloud; This is one of the reasons why this is a SaaS business that can thrive in the AI world.
Exposure to AI agent is the underappreciated catalyst. Each new AI workload – Co-pilots, autonomous agents, LLM API calls – is a new traffic flow that must be audited, secured, and managed by policy. Zscaler’s AI Guardrails for public and specialized applications, along with its expanding AI security portfolio, are purpose-built to address the emerging risks posed by AI models and applications.
It doesn’t show that none of these exist any business risks. Net retention may slow if corporate budget cycles tighten. Hyperscaler competition, macro headwinds, and non-monetized AI features. While GAAP losses have narrowed, it provides ammunition to critics who argue that the profitability story is constantly being delayed. This is an important quarter because the street’s expectation is for reported profits. The stock has rebounded meaningfully from its lows on this expectation, so some of the good news may already be priced in.
Bottom line: Fundamentals are consolidating, the AI security thesis is real and accelerating, the balance sheet is clean, and the market has already told me that fear is fairly priced in.
I’ll be covering the other side of that fear all day.
