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‘Down But Not Out’: UBS Suggests Buying the Dip in These 2 Buy-Rated Stocks

In Business
June 09, 2024

The stock market continues to thrive this year, with the S&P 500 up almost 13% and the NASDAQ flying high with a 16% surge. Just like last year, the mega-cap tech stocks have been leading the gains, and providing a positive impetus for the markets as a whole.

But the tech giants are not the whole story. Investors are finding good news in several other areas, including the outlook for the Federal Reserve’s interest rate policy. Inflation remains stubborn, but the general outlook is that the Fed will provide overall economic support with rate cuts later this year.

The investment bank UBS takes these points – the strong tech performance and the Fed outlook – and builds an overall positive stance, forecasting solid market growth.

“We continue to see the current environment as supportive for US equities, driven by solid earnings growth, a potential Fed pivot later this year, and accelerating AI investment,” UBS’ chief investment office says. “Overall, we maintain our 9% earnings growth forecast for the S&P 500 this year… We maintain the view that US rate cuts are likely just pushed back, not canceled. We see two 25-basis-point cuts this year, most likely starting in September.”

Against this backdrop, UBS stock analyst Roger Boyd has come down strong for buying two tech stocks ‘on the dip.’ That is, while their share prices are down. These stocks are down but not out, and as Boyd notes, they’re worth investor interest. We’ve used the TipRanks platform to look up the broader view of each, and found that they boast Buy ratings and solid upside potentials from the rest of the Street. Here are the details.

SentinelOne (S)

First up is SentinelOne, a cybersecurity firm dedicated to protecting the essential digital infrastructure that today’s networked systems depend on. SentinelOne offers enterprise customers a security platform that is optimized for business needs – and that puts all digital security functions into one interface. It’s a single cybersecurity platform that consolidates products and business functions to maximize value. The company estimates that its customers realize 66% reduction in security -related costs, while gaining a 90% increase in efficiency.

SentinelOne’s platform allows users to protect endpoints, securely managing assets while preventing attackers from gaining entry; to secure cloud operations, a natural weak point in cybersecurity; and to fortify identities, to reduce risk on active directories, to detect and stop misuse of credentials, and to prevent unauthorized lateral movements. Together, these features add up to solid digital protection, for business PCs, mobile devices, IoT – in short, for any set of devices that can be connected to a network, and can originate, send, or receive information.

No cybersecurity firm can be comprehensive unless it stays at the cutting edge of today’s tech – and that means making effective use of AI. SentinelOne offers its proprietary Purple AI, an AI-powered security analysis software designed to bring earlier detection and faster response to the table, so that users can stay ahead of any potential attacker. According to the company, early adopters of Purple AI reported 80% faster threat detection.

All of this adds up to a solid online security firm. Nevertheless, shares in S have been taking a beating this year (down by 37% year-to-date) with a big leg down taking place after the company’s fiscal 1Q25 report disappointed on forward guidance.

So what did the Q1 report say? The immediate quarterly financial results came in ahead of expectations. Revenue, at $186.4 million, was up over 39.7% year-over-year and beat the forecast by $5.3 million. The bottom line figure – the non-GAAP EPS – came in a flat zero, breaking even – but that was 5 cents per share better than had been expected. Annualized recurring revenue, ARR, as of April 30 this year, was up 35% year-over-year to $762 million, and the company reported a 30% increase in customers with ARR of $100,000 or more.

But – the company cut back on its fiscal 2025 revenue guidance, trimming from a range of $812 million-$818 million back to the range of $808 million-$815 million. The new guidance compares unfavorably to the consensus expectation for the company’s fiscal year 2025, which predicted revenue of $817.28 million.

Turning to the UBS view, and analyst Roger Boyd, we find that he is upbeat on S, despite the lowered guidance. Instead of drawing back, Boyd would use the lower stock price to buy in, and writes, “Even with CY24 ARR estimates coming down 2%, S remains one of the cheapest stocks on a growth-adjusted basis at ~0.20x EV/S/G on both CY24 and CY25 estimates. While the company appears limited by the push towards profitability (single-digit opex growth), it remains a technology leader and a strategic asset, in our view. In particular, the company appears to have momentum around its Purple AI offering, which drew a significant amount of attention at RSA, and early customer feedback appears to support the claims around automation.”

Boyd goes on to rate S shares as a Buy, with a $27 price target implying a one-year upside potential of 57%. (To watch Boyd’s track record, click here)

From Wall Street generally, this cybersecurity firm gets a Moderate Buy rating, based on 21 recent recommendations that include 14 to Buy and 8 to Hold. The shares are priced at $17.18 and their $26 average price target suggests a gain of 51% on the one-year time frame. (See SentinelOne’s stock forecast)

Zscaler (ZS)

The second UBS pick we’ll look at is Zscaler. This company calls its cloud-native network security platform the ‘Zero Trust Exchange, a name that sums up its approach to cybersecurity: no trust without verification. The platform provides any-to-any security for cloud networks, designed, in the company’s words, to ‘securely connect individual users, devices, and applications.’ Zscaler exchange can connect any device or app, from any location, to both internal and external apps, while providing solid protection, at any scale, for the user’s system and networks.

Some numbers will show the size of the job, and underscore the magnitude of Zscaler’s success in the industry. The company monitors 400-plus billion daily online transactions, and prevents over 9 billion daily security incidents and/or policy violations. The platform also monitors over 500 trillion daily signals for AI and machine learning effect, in short, teaching itself how to more effectively monitor the online and cloud security environment. The company boasts over 7,500 customers, including a large portion of companies on the Forbes Global 2000 list.

While cybersecurity is in high demand, Zscaler’s shares have seen a decline in 2024, falling by 29% from the peak reached earlier in the year. That said, the stock has been gaining recently following the May 30 release of the fiscal 3Q24 results.

Those results were solid. Zscaler’s revenue for the quarter came to $553.2 million, for a 32% year-over-year increase – and beating the forecast by over $17 million. Non-GAAP EPS hit 88 cents per share, a full 23 cents ahead of expectations. Another metric, that bodes well going forward, was the deferred revenue, or the backlog; this was reported as $1.577 billion as of April 30 this year, a figure that was up 34% from the prior year. Calculated billings in fiscal Q3 were up 30% year-over-year, to $628 million. Finally, Zscaler finished the quarter with deep pockets, reporting $2.24 billion in cash and other liquid assets.

Scanning the results, while aware where some issues will arise moving forward, UBS analyst Boyd takes a positive stance, writing, “ZS reported strong F3Q results that were ahead of expectations, delivering billings growth of 30% and other profitability metrics meaningfully above expectations. The initial FY25 outlook for roughly 20-21% billings growth should ease investor concerns on the topline; however, the debate from here will likely center around margin upside following a FY25 profitability outlook that on the margin appears a bit light. That said, results were much better than feared, and with the impressive topline performance and improving GTM execution commentary against a still-tough macro, we’re incrementally more positive after the print.”

Boyd takes his ‘incrementally more positive’ view and uses it to back a Buy rating here, while his $270 price target shows that he is confident in a 49% upside in the next 12 months.

The UBS view here is more upbeat than the overall Street take – which is already decent enough. ZS stock has a Strong Buy consensus rating, based on 30 recent reviews including 23 to Buy against 7 to Hold. The shares are priced at $180.99 and have an average target price of $228.57, implying a 26% one-year upside potential. (See ZS stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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