Key Takeaways:
Zscaler's 53% decline reflects a market repricing of slowing growth, not a broken business.
Zscaler's revenue growth has slowed from above 40% to the mid-20% range, with fiscal 2027 guidance of roughly 16% — a trajectory that has erased more than half the company's market value over the past year.
"Investors are no longer willing to pay premium valuations for slowing growth, even if the business remains fundamentally healthy," the Zacks report said, noting the stock now trades at 6.25 times forward sales versus the security software industry average of 19.33 times.
The company's fiscal third-quarter results showed revenue of $850 million, up 25% year over year, with annual recurring revenue reaching $3.53 billion. Remaining performance obligations climbed about 30% to $6.5 billion. Yet management expects capital expenditures to reach the high single digits as a percentage of revenue in fiscal 2026, up from earlier expectations of the mid-single digits, driven by rising costs for AI-related hardware.
The question for investors is whether Zscaler's AI security business can offset the growth deceleration. Bookings for its AI Protect product have exceeded $100 million over the past year, and the company's Data Security business has surpassed $500 million in ARR, growing more than 30% annually. If enterprise AI adoption accelerates, Zscaler's Zero Trust platform could capture a meaningful share of that spending — but fiscal 2027 will test whether the company can reaccelerate without the infrastructure cost headwinds.
The Valuation Gap Widens
Zscaler's forward price-to-sales multiple of 6.25 represents a steep discount to its cybersecurity peers. Palo Alto Networks trades at 20.25 times, CrowdStrike at 30.52 times, and Fortinet at 14.16 times forward sales. Some of that gap is justified by Zscaler's slowing growth, but the company is still expanding margins — non-GAAP operating margin improved 140 basis points to 23% in the third quarter — and generating free cash flow at a 29% margin year to date.
The divergence is stark when measured against the broader Zacks Security industry, which has gained 45.5% over the past year while Zscaler has fallen 52.7%. Fortinet, CrowdStrike, and Palo Alto Networks have rallied 47%, 51.7%, and 63.4%, respectively, over the same period.
Platform Expansion Offers a Counter-Narrative
Zscaler's "Zero Trust Everywhere" customer count — organizations using the platform across users, cloud workloads, and branch environments — increased from more than 550 in the fiscal second quarter to above 700 in the third quarter. The company's Z-Flex program, which encourages multi-year commitments, generated more than $480 million in contract value in the third quarter alone, up more than 60% sequentially, and has produced more than $1 billion over the past year.
Customer engagement remains healthy. Zscaler now counts 748 customers generating more than $1 million in annual recurring revenue and more than 4,000 customers contributing above $100,000 annually. The planned acquisition of Symmetry Systems and partnerships with OpenAI and Anthropic could further strengthen its position in securing enterprise AI workloads.
For long-term investors, the risk is that fiscal 2027 brings slower revenue growth and higher infrastructure spending, keeping the stock volatile. But the combination of solid execution, expanding platform adoption, and a much more reasonable valuation supports a hold stance rather than an exit, according to the Zacks analysis. Zscaler currently carries a Zacks Rank No. 3 (Hold).
This article is for informational purposes only and does not constitute investment advice.
