Zero Trust And AI Security Will Unlock Future Markets

Key Takeaways

• Growing adoption of advanced cloud security solutions and platform innovation is boosting upsell opportunities, long-term customer value, and expanding Zscaler's market share.
  
• Rapid response to AI-driven threats and shifting industry trends supports sustained revenue growth, higher margins, and increasing operating efficiency through automation and scale.
  
• Growing competition, talent shortages, and aggressive expansion are pressuring Zscaler's profitability, margins, and long-term market share in an evolving cybersecurity landscape.

Catalysts

Operates as a cloud security company worldwide.

• Accelerating customer adoption of Zero Trust Everywhere and Data Security Everywhere solutions, particularly among Global 2000 and Fortune 500 firms, is fueling large upsell deals and higher ARR per customer, which should drive sustained double-digit revenue growth and improve net retention rates.
  
• Explosive growth in AI/ML traffic and emerging threats is creating new security challenges that Zscaler is rapidly addressing with differentiated AI security and agentic operations products, positioning the company to capture a rising share of incremental cyber budgets and expand recurring ARR over the long term.
  
• The transition away from legacy security appliances (firewalls, SD-WAN) in favor of unified cloud-delivered security architectures is gaining momentum across key verticals like retail and manufacturing, supporting a multi-year replacement cycle that will boost platform adoption, revenue, and margins.
  
• Strategic platform innovation and programs like Z-Flex are driving broader product adoption within existing accounts and enabling larger, multi-year deals, increasing total contract value and supporting higher future operating margins through scale.
  
• Ongoing investments in go-to-market and operational scale, combined with improving automation and integration from recent acquisitions (e.g., Red Canary), are expected to unlock further operating leverage, resulting in sustained improvement of operating and free cash flow margins.

Zscaler Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Zscaler's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.4% today to 2.6% in 3 years time.
• Analysts expect earnings to reach $132.0 million (and earnings per share of $1.06) by about August 2029, up from -$77.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $282.5 million in earnings, and the most bearish expecting $49.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 330.2x on those 2029 earnings, up from -365.6x today. This future PE is greater than the current PE for the US Software industry at 31.7x.
• Analysts expect the number of shares outstanding to grow by 2.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

Risks

• Increasing integration of security capabilities by public cloud providers (like AWS, Azure, Google Cloud) could erode Zscaler's competitive advantage and reduce its total addressable market, which would pressure both revenue growth and future earnings.
  
• Intensifying competition from established cybersecurity vendors and cloud-native platform companies may drive pricing pressure, force higher sales & marketing spend, and compress Zscaler's gross and operating margins over the long term.
  
• The rapid pace of new product launches focused on growth over profitability-such as in AI security and Zero Trust Branch-may sustain lower gross margins for longer periods, delaying improvements in net margins and affecting earnings quality.
  
• The ongoing global cybersecurity talent shortage and high reliance on stock-based compensation to attract and retain specialized employees could significantly raise operating costs and dilute future earnings per share and share price appreciation.
  
• Market consolidation through M&A or expansion of bundled security offerings by larger players could limit Zscaler's stand-alone market share, weaken pricing power, and ultimately put long-term revenue and net retention rates at risk.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $196.95 for Zscaler based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $250.0, and the most bearish reporting a price target of just $145.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $5.1 billion, earnings will come to $132.0 million, and it would be trading on a PE ratio of 330.2x, assuming you use a discount rate of 8.7%.
• Given the current share price of $174.95, the analyst price target of $196.95 is 11.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.