Is Zscaler Stock a Buy, Sell or Hold at a P/S Multiple of 15.56X?
Zscaler Forward 12 Months (P/S) Valuation Chart
Zscaler's Slowing Growth Rates are Concerning
The overvaluation seems more concerning because Zscaler is facing a slowdown in revenue growth. In the third quarter of fiscal 2025, Zscaler posted year-over-year revenue growth of 22.6%. Zscaler maintained revenue growth in the 20% range across all three quarters of fiscal 2025 compared to growth in the 30% range during fiscal 2024 and the 40% range in fiscal 2023.
Zscaler's revenue growth forecast for fiscal 2025 doesn't look encouraging either, as it expects it to be around 22.7%. In its third-quarter fiscal 2025 earnings results, the company acknowledged that economic uncertainty has forced its customers to be cautious with IT budgets, leading to deal scrutiny and longer deal cycles by larger customers.
Slowing momentum in the top line is likely to compress margins. Zscaler faces rising competition from other established cybersecurity players, including Palo Alto Networks PANW, CyberArk CYBR and CrowdStrike CRWD. Palo Alto Networks and CrowdStrike are heavily investing in Agentic Operations, which tends to be the future of cybersecurity, putting significant pressure on Zscaler to innovate. Zscaler and CyberArk overlap across Zero Trust Strategy, Identity Threat Detection and Secure Remote Access verticals.
Due to these factors, Zscaler has to keep its spending high on R&D as it has to stay ahead in the market. The company is also expanding its S&M capabilities, particularly by increasing the sales force, which might weigh on its near-term profitability. The Zacks Consensus Estimate for Zscaler's fiscal 2025 earnings implies a year-over-year decline of 0.31%. However, not everything is gloom and doom for Zscaler.
Zscaler's Investments Could Fuel Long-Term Growth
Zscaler remains at the forefront of the cybersecurity space through its innovative efforts. Zscaler has been successful in implementing its Zero Trust Exchange with Zero Trust Everywhere offerings that gained more than 210 adoptions, growing 60% quarter over quarter in the third quarter of fiscal 2025. Zscaler aims to exceed 390 customers by the end of fiscal 2026.
Zscaler is also gaining from its agentic operations solutions. Zscaler's SecOps business experienced 120% year-over-year growth in annual contract value since the integration of agentic operations in its security solutions. Driven by these factors, the New Growth Categories, which account for Zero Trust Everywhere, Data Security Everywhere and Agentic Operations, reached the milestone of approximately $1 billion in annual recurring revenues (ARR), while ZS' total ARR reached $2.9 billion in the third quarter of fiscal 2025.
In 2025, ZS also launched the Asset Exposure Management solution to enhance organizations' asset risk management capabilities. Zscaler has also partnered with SAP to integrate its Zero Trust Network Access service, Zscaler Private Access, within SAP's RISE framework. ZS acquired Red Canary to enhance its capabilities in Managed Detection and Response operations.
Zscaler is also enhancing its portfolio of offerings with the integration of artificial intelligence (AI) in its products. Zscaler partnered with NVIDIA and integrated NVIDIA's AI technologies, including NIM inference microservices, NeMo Guardrails and Morpheus framework into its Zero Trust Security model. Zscaler partnered with CrowdStrike to leverage CrowdStrike's AI expertise in SIEM, threat intelligence, cyber risk quantification and real-time insights.
Beyond product innovation, Zscaler is also implementing new purchase programs like Z-Flex. The Z-Flex purchasing program simplifies procurement and allows customers to scale adoption of Zscaler's platform. Z-Flex generated $65 million in TCV bookings in its first quarter, where large clients like a Fortune 500 tech firm increased their ARR by more than 40% to nearly $19 million.
Zscaler Expands Its Government Client Base
Zscaler is enhancing its GovCloud solutions to receive faster approvals from the governing bodies. ZS is expanding its presence among government agencies through compliance with government security standards. Zscaler has enabled numerous government agencies to utilize AI-powered Cloud Browser Isolation and IPv6 for secure connectivity, mainstreaming its GovCloud solution among its federal clients.
In the last reported quarter, Zscaler reported that it is serving 14 out of 15 U.S. cabinet-level agencies. As more government agencies use Zscaler's products, the company's presence in the public sector could expand, providing a stable growth stream. ZS' recent inclusion in Amazon Web Services' Internet Control Message Protocol, which will ensure that Zscaler's cybersecurity solutions will now be readily accessible to U.S. federal agencies, furthers its reach among federal agencies.
All these factors have won investors' confidence in Zscaler's long-term growth strategy. Zscaler's share price has surged 74% year to date, much higher than the Zacks Security Industry's return of 25.7%. Zscaler has also outperformed its peers, including CyberArk, CrowdStrike and Palo Alto Networks, which have returned 22.2%, 48.9% and 12.5%, respectively.
Conclusion: Hold ZS Stock for Now
Although Zscaler faces challenges related to increasing expenses, shrinking margins and premium valuation, the company's heavy investment in AI, innovative cybersecurity capabilities, customer retention and long-term contracts with government agencies make the stock worth retaining at present. Zscaler carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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