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Zscaler Lags Cybersecurity Peers: Should Investors Hold the Stock?
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Key Takeaways
Zscaler stock gained just 0.9% year to date, lagging cybersecurity peers amid slowing growth and rising costs.
Zscaler expects 17% revenue and ARR growth in FY27, while higher spending pressures cash flow margins.
AI security bookings surged over 50% QoQ, while Zero Trust adoption and Z-Flex bookings gained traction.
Zscaler, Inc. (ZS - Free Report) has struggled to keep pace with the broader cybersecurity sector this year. The stock has gained a mere 0.9% year to date, while the Zacks Security industry has surged 80.7%.
The performance gap is even wider compared with some of Zscaler’s biggest competitors, including CrowdStrike Holdings, Inc. (CRWD - Free Report) , Palo Alto Networks, Inc. (PANW - Free Report) and Fortinet, Inc. (FTNT - Free Report) . CrowdStrike, Palo Alto Networks and Fortinet have soared 109.4%, 90.2% and 61.3%, respectively, over the same period.
Zscaler YTD Price Return Performance
Image Source: Zacks Investment Research
This sharp underperformance raises concerns about investor confidence in Zscaler’s growth prospects. Slowing revenue growth and rising investments have weighed on sentiment. However, the company continues to expand its AI security offerings and strengthen its Zero Trust platform.
So, is Zscaler’s recent weakness a buying opportunity, or should investors remain cautious? While its long-term growth opportunities remain attractive, near-term challenges suggest that holding the stock is the better approach for now.
Slowing Growth and Higher Spending Weigh on Zscaler
Zscaler’s slowing growth is one of the biggest concerns for investors. Both revenues and annual recurring revenues (ARR) increased 25% in fiscal 2026. Although this represents healthy growth, it is considerably slower than the pace the company delivered during its earlier expansion years.
The outlook also suggests further moderation. Management expects revenue and ARR growth of approximately 17% in fiscal 2027. The Zacks Consensus Estimate points to another slowdown, with revenues projected to increase 15.9% in fiscal 2028.
Zscaler Sales and EPS Growth Estimates
Image Source: Zacks Investment Research
Rising investments are adding to the concerns. Zscaler is spending more to strengthen its AI capabilities and expand its broader security platform. Capital expenditure increased to 8.3% of fiscal 2026 revenues from 6.1% in fiscal 2025. Management expects capital spending to remain elevated in fiscal 2027, potentially reaching the low-teens percentage of revenues.
These investments could help Zscaler capture the growing demand for AI security. However, higher spending becomes a concern when revenue growth is slowing.
The impact is already visible in cash flow. Zscaler’s free cash flow margin declined to 23% in fiscal 2026 from 27% a year earlier. Management expects the metric to remain in the 23-23.5% range in fiscal 2027.
ZS’ AI Security & Zero Trust Offer New Growth Opportunities
Despite the near-term challenges, Zscaler's long-term business prospects remain encouraging. Growing cloud adoption, rising cybersecurity threats and increasing enterprise investments in AI security provide several opportunities. The company is expanding beyond its traditional user-based security business and targeting workloads, branches, AI applications and AI agents. This broader approach could help Zscaler increase its addressable market and generate additional revenues from existing customers.
AI security is emerging as an important growth driver. Security for AI bookings increased more than 50% sequentially in the fourth quarter of fiscal 2026, following strong growth in the previous quarter. Zscaler is also developing solutions such as Zero Trust Exchange for Agents and Endpoint AI Security, which are expected to scale in the second half of fiscal 2027.
Its Zero Trust Everywhere strategy is also gaining traction. The number of enterprises using combinations of Zero Trust Users, Zero Trust Cloud and Zero Trust Branch increased to more than 950 at the end of the fourth quarter compared with more than 700 in the third quarter and 350 a year earlier. This is an encouraging development because it indicates that customers are adopting more Zscaler products rather than simply increasing the number of users on its platform.
Non-seat-based, metered products contributed approximately 30% of new and upsell annual contract value in the fourth quarter and fiscal 2026. ARR from these offerings more than doubled year over year.
Zscaler's Z-Flex program is another upside. The program generated more than $770 million in total contract value bookings in the fourth quarter, up 60% sequentially. Z-Flex allows customers to adopt multiple Zscaler products through flexible contracts, potentially improving customer retention, expanding product adoption and strengthening long-term revenue visibility.
These developments suggest that Zscaler is making progress in diversifying its revenue sources.
Zscaler's Valuation Looks Attractive Compared With Peers
Zscaler's valuation offers some support to the investment case. The stock currently trades at a forward 12-month price-to-sales (P/S) ratio of 8.97, significantly below the Zacks Security industry average of 17.55.
Zscaler Forward 12-Month P/S Ratio
Image Source: Zacks Investment Research
The valuation also looks relatively attractive compared with major cybersecurity competitors. Fortinet, Palo Alto Networks and CrowdStrike trade at forward P/S multiples of 10.30, 19.48 and 35.63, respectively.
Conclusion: Hold Zscaler Stock for Now
Zscaler has several long-term growth opportunities, particularly in AI security, Zero Trust and cloud protection. Its expanding product portfolio, growing adoption of non-seat-based offerings and strong Z-Flex bookings are encouraging signs.
However, slowing revenue and ARR growth, higher capital spending and a weaker free cash flow margin remain important concerns. Although Zscaler's valuation looks attractive relative to its peers, near-term business challenges could limit a meaningful recovery.
Considering these factors, we opine that existing shareholders should retain their positions while continuing to monitor revenue growth, free cash flow margins and the contribution of AI security products. A sustained improvement in these metrics could provide a stronger reason to turn more bullish on the stock.
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Zscaler Lags Cybersecurity Peers: Should Investors Hold the Stock?
Key Takeaways
Zscaler, Inc. (ZS - Free Report) has struggled to keep pace with the broader cybersecurity sector this year. The stock has gained a mere 0.9% year to date, while the Zacks Security industry has surged 80.7%.
The performance gap is even wider compared with some of Zscaler’s biggest competitors, including CrowdStrike Holdings, Inc. (CRWD - Free Report) , Palo Alto Networks, Inc. (PANW - Free Report) and Fortinet, Inc. (FTNT - Free Report) . CrowdStrike, Palo Alto Networks and Fortinet have soared 109.4%, 90.2% and 61.3%, respectively, over the same period.
Zscaler YTD Price Return Performance
Image Source: Zacks Investment Research
This sharp underperformance raises concerns about investor confidence in Zscaler’s growth prospects. Slowing revenue growth and rising investments have weighed on sentiment. However, the company continues to expand its AI security offerings and strengthen its Zero Trust platform.
So, is Zscaler’s recent weakness a buying opportunity, or should investors remain cautious? While its long-term growth opportunities remain attractive, near-term challenges suggest that holding the stock is the better approach for now.
Slowing Growth and Higher Spending Weigh on Zscaler
Zscaler’s slowing growth is one of the biggest concerns for investors. Both revenues and annual recurring revenues (ARR) increased 25% in fiscal 2026. Although this represents healthy growth, it is considerably slower than the pace the company delivered during its earlier expansion years.
The outlook also suggests further moderation. Management expects revenue and ARR growth of approximately 17% in fiscal 2027. The Zacks Consensus Estimate points to another slowdown, with revenues projected to increase 15.9% in fiscal 2028.
Zscaler Sales and EPS Growth Estimates
Image Source: Zacks Investment Research
Rising investments are adding to the concerns. Zscaler is spending more to strengthen its AI capabilities and expand its broader security platform. Capital expenditure increased to 8.3% of fiscal 2026 revenues from 6.1% in fiscal 2025. Management expects capital spending to remain elevated in fiscal 2027, potentially reaching the low-teens percentage of revenues.
These investments could help Zscaler capture the growing demand for AI security. However, higher spending becomes a concern when revenue growth is slowing.
The impact is already visible in cash flow. Zscaler’s free cash flow margin declined to 23% in fiscal 2026 from 27% a year earlier. Management expects the metric to remain in the 23-23.5% range in fiscal 2027.
ZS’ AI Security & Zero Trust Offer New Growth Opportunities
Despite the near-term challenges, Zscaler's long-term business prospects remain encouraging. Growing cloud adoption, rising cybersecurity threats and increasing enterprise investments in AI security provide several opportunities. The company is expanding beyond its traditional user-based security business and targeting workloads, branches, AI applications and AI agents. This broader approach could help Zscaler increase its addressable market and generate additional revenues from existing customers.
AI security is emerging as an important growth driver. Security for AI bookings increased more than 50% sequentially in the fourth quarter of fiscal 2026, following strong growth in the previous quarter. Zscaler is also developing solutions such as Zero Trust Exchange for Agents and Endpoint AI Security, which are expected to scale in the second half of fiscal 2027.
Its Zero Trust Everywhere strategy is also gaining traction. The number of enterprises using combinations of Zero Trust Users, Zero Trust Cloud and Zero Trust Branch increased to more than 950 at the end of the fourth quarter compared with more than 700 in the third quarter and 350 a year earlier. This is an encouraging development because it indicates that customers are adopting more Zscaler products rather than simply increasing the number of users on its platform.
Non-seat-based, metered products contributed approximately 30% of new and upsell annual contract value in the fourth quarter and fiscal 2026. ARR from these offerings more than doubled year over year.
Zscaler's Z-Flex program is another upside. The program generated more than $770 million in total contract value bookings in the fourth quarter, up 60% sequentially. Z-Flex allows customers to adopt multiple Zscaler products through flexible contracts, potentially improving customer retention, expanding product adoption and strengthening long-term revenue visibility.
These developments suggest that Zscaler is making progress in diversifying its revenue sources.
Zscaler's Valuation Looks Attractive Compared With Peers
Zscaler's valuation offers some support to the investment case. The stock currently trades at a forward 12-month price-to-sales (P/S) ratio of 8.97, significantly below the Zacks Security industry average of 17.55.
Zscaler Forward 12-Month P/S Ratio
Image Source: Zacks Investment Research
The valuation also looks relatively attractive compared with major cybersecurity competitors. Fortinet, Palo Alto Networks and CrowdStrike trade at forward P/S multiples of 10.30, 19.48 and 35.63, respectively.
Conclusion: Hold Zscaler Stock for Now
Zscaler has several long-term growth opportunities, particularly in AI security, Zero Trust and cloud protection. Its expanding product portfolio, growing adoption of non-seat-based offerings and strong Z-Flex bookings are encouraging signs.
However, slowing revenue and ARR growth, higher capital spending and a weaker free cash flow margin remain important concerns. Although Zscaler's valuation looks attractive relative to its peers, near-term business challenges could limit a meaningful recovery.
Considering these factors, we opine that existing shareholders should retain their positions while continuing to monitor revenue growth, free cash flow margins and the contribution of AI security products. A sustained improvement in these metrics could provide a stronger reason to turn more bullish on the stock.
Zscaler currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.