The Zscaler Sell-Off: Has the Market Overreacted?

Zscaler (NASDAQ: ZS) reported its latest earnings numbers this week, and to say that investors weren't impressed would be a massive understatement. The stock plunged nearly 32% on Wednesday amid the release of its numbers and guidance.

When a stock tanks so much so quickly, it begs the question of whether or not the market has overreacted. While the stock could be heading even lower, there's the possibility that it might also have become a bargain buy in the process. Is Zscaler stock a good buy right now? Let's find out.

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Why investors dumped Zscaler's stock

At first glance, the cybersecurity company appeared to have delivered strong numbers for its third quarter, which ended on April 30. It beat expectations for revenue and adjusted earnings, with its top line looking particularly strong, rising by 25% year over year, to $850.5 million.

What discouraged investors was the outlook for the business, with Zscaler noting that it lost a couple of important salespeople and that, as a result, it would be taking a cautious approach with respect to its guidance; Zscaler's forecast for the next fiscal year is for its growth rate for annual recurring revenue to be between just 16% to 17%. And for the current quarter, Zscaler expects revenue of $875 million to $878 million, while analysts were projecting about $878.6 million.

It's not a huge miss, but the guidance was the big reason for the stock's freefall.

Has Zscaler become a dirt cheap growth stock?

The massive sell-off yesterday means that Zscaler's stock is now down more than 40% since the beginning of the year, and it's now down 61% from its 52-week high of $336.99. Based on analyst projections, the stock is trading at a forward price-to-earnings multiple of 27, which is higher than the S&P 500 average of about 22.

Zscaler's stock was looking overpriced before the sell-off, and this correction may give investors the opportunity to buy back in at a much more attractive price. While I wouldn't call it a bargain buy, it has the potential to be a good long-term investment given the opportunities in cybersecurity, especially with artificial intelligence introducing new threats for companies and individuals to worry about.

The stock has been rallying today, a sign that some investors may see an opportunity for a bounce back. If you're willing to hang on for the long haul, Zscaler's stock could be a good pick up at its current price.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zscaler. The Motley Fool has a disclosure policy.