ZS downgrade

Investment Analysis Clubs Saul’s Investing Discussions
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Here is an article from Seeking Alpha on OTR’s downgrade on ZS:

"OTR Global downgrades Zscaler (NASDAQ:ZS) from Mixed to Negative, citing growth that seems to be lagging compared to the overall security market.

The firm says Q4 rates “slightly” weaker and deteriorated for some partners compared to Q3. OTR sees increased competition among Zscaler’s channel partners.

ZS will report earnings on September 10. Consensus estimates expect revenue of $82.83M with $0.02 EPS."

Here is the what was discussed in the last earning call with respect the Q4 guidance:

“Please keep in mind that next quarter we’ll have a difficult comparison with a large public sector deal that closed in Q4, 2018. This deal added $16.5 million to billings and $26 million the backlog in the July quarter, which will pose a difficult year-over-year comparison in Q4…For the fourth quarter, we expect revenue in the range of $81 million to $83 million, reflecting year-over-year growth of 44% to 48%; operating profit in the range of zero to $2 million; income taxes of $700,000, earnings per share of approximately $0.01 to $0.02, assuming $138 million common shares outstanding.
For the full-year 2019, we expect revenue in the range of $298 million to $300 million or year-over-year growth of 57% to 58%; billings in the range of $379 million to $381 million or year-over-year growth of 47% to 48%; operating profit in the range of $17 million to $19 million; income taxes of $2.2 million; and earnings per share in the range of $0.16 to $0.18, assuming approximately 136 million common shares outstanding.”

You see, OTC is just playing the game here by shrewdly reciting what was discussed during the last earning call, without mentioned the details. They achieved their objective of driving some share holders into panic selling.

So, other than a temporary lower stock price, nothing to worry about.

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I am not sure an obscure research firm’s dubious downgrade could be the primary driver for the big selloff today. Either (1) there is someone trying market manipulation or possessing insider information, or (2) some algorithm trading got triggered but the report, or (3) market is somewhat on edge especially for the richly valued hyper growth stocks that have seen hefty returns, so some institutional money just want to use any excuse to rotate out.

Need to watch what happens next very closely.

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Nice, Klay.

If we assume that Zscaler will meet or exceed their own guidance for this quarter as the business continues to grow as expected, that may confirm the negative assessment and cause the stock to drop. And thinking along these lines, other analysts may jump in with downgrades. Short term thinking, but perhaps even better buying opportunities are coming. And long term it appears to be a non-event.

Also, they have their annual ZenithLive Zscaler Cloud Summit Sept 16-18 (Las Vegas), and that may cause a lift in the outlook. I’m not seeing any negative news other than from OTR Global.

Enjoy,
Brian

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You see, OTC is just playing the game here by shrewdly reciting what was discussed during the last earning call

May be. OTOH, this is nothing new, after the initial decline the stock could have recovered as the news is digested, but not. Perhaps, OTR is hinting over and beyond what the company guided. The phrase “Q4 rates “slightly” weaker and deteriorated for some partners compared to Q3”, which is sequential quarter and not comparing y-o-y.

OTR is not your regular brokerage firm, or an investment firm, (firms that trade stocks) but a firm that makes money by selling research to institutional clients. If they pull a stunt like this, that will damage their credibility long-term.

Again, I have no idea how they determined weakness (I have my own theory why they disclosed it, it is more to do with FD regulations than market manipulation), but the quarter is already over for ZS (May, June, July), so give OTR benefit of doubt that they may be talking about a revenue miss viz-a-viz to the guidance.

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recsll February TTD was downgraded days before their earnings release was due. Then they had a blowout quarter causing the stock to go up. This can only be a game playing downgrading a stock days before its earnings. And that was Stifel. Not some no-name broker. If OTR makes money by research reports and not money management that makes them even more suspect.

Too many of these research reports are wrong. Too many research reports crashing the stocks that turn out to be wrong may give you an edge buying after such incidents rather than selling along with Everyone else.

Without buying the research report we don’t even know what it says. Was it all security, only ZSckaler, or justvweakness overall withbthese channel partners? We don’t know. And I’m not about to spend a dime on the report to find out.

If it’s the latter that may be the canary in the coal mine enterprise software is following hardware finally a year later into an overall slowdown and that’s the one and only thing I’m worried about.

These reseller partners OTR mentions are most likely resellers of many software applications. If they are slowing down that could be a harbinger if things to come.

But as it is now I’m not about to panic when the first signal I’m getting is a downgrade from a research report by a no name research company possibly paid for by short sellers I have not even read.

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I read somewhere that they ‘checked the channels’. and found some weaknesses.

What does that mean?

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They checked the resellers of ZScaler products. That’s what checking the channels means. They reported what they had to say. Apparently 10 of 14 resellers of ZScaler products reported weakness.

In other words checking who buys from The company in question is checking the channels.

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and how the reseller business compare to the rest of the business and to what is directly sold by Zscaler?

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Either (1) there is someone trying market manipulation or possessing insider information, or (2) some algorithm trading got triggered but the report, or (3) market is somewhat on edge especially for the richly valued hyper growth stocks that have seen hefty returns (bashuzi, #58792)

I think it could be a bit of all three of these. We’ve already discussed (1) and OTR. Regarding (3), we all know that hyper growth stocks are more volatile. And within this batch, ZS is among the highest valued.

One day last week (sorry, I don’t remember which day), when trying to decide which position(s) to add to, I was curious about relative valuation, so I went into Finviz (yes, I know, I know…) and jotted down the P/S of my top 7 holdings on a piece of scratch paper. Then, I threw it away, thinking I’d never see it again.

Today, after ZS didn’t shoot back up like I expected and dipped below $70, and there were discussions of ZS’s valuation (see Saul’s thread on “Morningstar counters OTR on ZS”), I dug that piece of paper out of my recycling bin and compared those numbers to the current valuations, which I also looked up on Finviz, for consistency. Here’s what I got:


         P/S LAST WEEK    P/S TODAY
AYX        26.8             25.3
MDB        26.3             24.9
OKTA       34.5             32.4
ROKU       18.4             17.1
TTD        23.1             19.1
TWLO       20.0             19.1
ZS         39.0             32.4

I know there are a number of things unideal with this – trusting bot-generated values, and not remembering the day/time of my first column’s data, the choice of P/S, etc. But the takeaway message to me is still clear: last week, ZS was easily the most overvalued of these 7, and it wasn’t just “borderline”. I think it’s very possible that the folks at OTR recognized that, which put it squarely in their crosshairs. And that’s my response to Kingran’s remark from #58795:

Again, I have no idea how they [OTR] determined weakness

It’s also possible that this led to bashuzi’s speculation that “(2) some algorithm trading got triggered but the report”, and is why it didn’t bounce back today like many of us were expecting.

Finally, for transparency: I added to ZS yesterday a bit early, at around $74 (bumping it from my #6 to #5 holding). But I’m not worried – I’m playing the long game like most of you. I also, like apparently several others of you, finally bit the bullet and subscribed to Bert’s newsletter this morning.

Going forward, I’m going to keep a closer eye on the relative valuations of my top 7 holdings, in case one strays from the pack. Especially because I auto-deposit to my account every month and need some “tiebreaking way” to figure out which position(s) to add to.

Matt
Long (top 7, in order): AYX, TTD, MDB, TWLO, ZS, OKTA, ROKU

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A Research firm has to add some non public value in order to get clients. But it is illegal to use real insider information. So they talk to customers or resellers of the firm they are reviewing. Whether these customers are typical and whether they are getting the info from a mail clerk is not stated.

I have found “channel checking” mostly to have little value.

Nothing fundamental about ZS has changed. However they are in the early stages of their business and it is likely to be lumpy. A big question is whether their new approach to security can become dominant or whether it will remain just one of many players.

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