After Earnings, Is Zscaler Stock a Buy, a Sell, or Fairly Valued?

Zscaler ZS released its fiscal first-quarter earnings report on March 5. Here’s Morningstar’s take on Zscaler’s earnings and stock.

Key Morningstar Metrics for Zscaler

What We Thought of Zscaler’s Earnings

Zscaler ZS reported strong second-quarter earnings, with the firm’s revenue growing 23% year over year to $648 million and an adjusted operating margin of 22%, up 210 basis points year over year. The firm also raised its sales and profitability outlook for fiscal 2025.

Why it matters: After facing go-to-market execution challenges in 2024, Zscaler’s improvements in its sales organization have been palpable in fiscal 2025. Further, as more sales reps ramp toward full capacity, we expect second-half sales growth to remain strong.

• We believe an improved sales motion and strong customer demand for Zscaler’s emerging products category will be key drivers for the firm’s top line in the second half of 2025 and beyond.
• Zscaler’s emerging products, which include solutions such as digital experience and artificial intelligence analytics, continue to impress us. Annual recurring revenue from this cohort grew twice as fast as the firm’s core products, and we expect strong upselling potential for emerging products.

The bottom line: We maintain our fair value estimate of $213 per share for Zscaler after the firm’s results were largely in line with our above-consensus estimates. With shares up 5% in after-hour trading, we view them as fairly valued.

• Zscaler’s improving sales execution was evident in its forward-looking indicators, remaining performance obligations and billings, which expanded 28% and 18% year over year, respectively.
• We believe the firm’s strong unit economics, underpinned by its software business model, will allow it to expand operating margins materially over our explicit forecast. We expect Zscaler to ramp to operating profitability by fiscal 2027.

Coming up: For fiscal 2025, management expects sales of $2.647 billion and adjusted earnings per share of $3.07. We view this as skewing conservative, and model Zscaler surpassing both targets.

Fair Value Estimate for Zscaler

With its 3-star rating, we believe Zscaler’s stock is fairly valued compared with our long-term fair value estimate of $213 per share, implying a 2025 enterprise value/sales multiple of 12 times.

We forecast Zscaler’s revenue growing at a 22% compound annual growth rate over the next five years. As enterprises increasingly shift network traffic routing directly to cloud applications, we see massive greenfield opportunities for the firm to take advantage of and grow its business. Additionally, we think Zscaler’s “land-and-expand” model will continue to bear fruit. The firm has shown great success in upselling its existing customers by either offering additional modules within a platform or cross-selling its Zscaler Private Access after initially landing with its Zscaler Internet Access offering. Going forward, we project continued up/cross-selling activity for the firm.

Read more about Zscaler’s fair value estimate.

Economic Moat Rating

We assign Zscaler a narrow moat, owing primarily to strong switching costs and secondarily to a network effect associated with its offerings. We believe the firm’s industry-leading zero-trust security solutions will continue to see robust enterprise adoption, allowing it to both retain and expand its footprint within existing organizations while landing new customers. As a result, we forecast Zscaler will generate excess returns over invested capital over the next decade.

Read more about Zscaler’s economic moat.

Financial Strength

We view Zscaler’s financial position as healthy. The firm ended fiscal 2024 with around $2.4 billion in cash and liquid investments. While Zscaler carries debt of around $1.1 billion, we believe its cash reserves and ability to generate healthy cash flow will cover its commitments over our explicit forecast.

While the firm has not posted GAAP profitability, Zscaler’s adjusted operating margins have been in the black since 2018 and reached 20% in 2024. We expect the company’s profitability to improve as it increases its operating leverage by toning down some of its research and sales expenditures.

Read more about Zscaler’s financial strength.

Risk and Uncertainty

We assign Zscaler a High Uncertainty Rating due to the firm competing in the ever-shifting cybersecurity space. While the company has positioned itself well to benefit from secular tailwinds, such as a shift to zero-trust security and the convergence of networking and security, the cybersecurity space is known for its rapid pace of development. Large incumbents that have performed exceptionally well in particular verticals can be disrupted by upstarts that offer better performance in key solutions. To stay ahead of the pack, Zscaler has invested a great deal in building out its ZIA and ZPA solutions. However, a shifting demand landscape and newer products that impact Zscaler’s competitive positioning pose a risk.

Read more about Zscaler’s risk and uncertainty.

ZS Bulls Say

• Zscaler has strong secular tailwinds, as the convergence of networking and the security market is in its early innings.
• Zscaler has market leadership and high enterprise penetration through its offerings related to secure web gateways and zero-trust network access.
• Consolidation of security vendors should benefit Zscaler, which has a wide array of solutions across an enterprise’s network security stack.

ZS Bears Say

• Large public cloud vendors often offer their own cybersecurity solutions, which could hamper Zscaler’s growth opportunities.
• Zscaler faces competition from vendors that have increasingly made investments in key areas where it has market-leading positions.
• There is always a risk that Zscaler misses out on the next big technology, allowing competitors to catch up.

This article was compiled by Aman Dagra.