ZS: Future Returns Will Rely On Expanding Demand For Zero Trust Security

Analysts have modestly trimmed our Zscaler price target by a low single digit percentage to reflect slightly higher discount rates and a more balanced interpretation of Q1 results. Strong ARR growth and traction in emerging products were partially offset by mixed guidance, underwhelming bottom line performance, and uneven disclosure around inorganic contributions.

Analyst Commentary

Bullish analysts remain constructive on Zscaler, viewing the recent quarter as supportive of the long term growth thesis despite modest target resets. They highlight solid execution on ARR, strong contribution from newer offerings, and an improving alignment with secular security and AI trends as key underpinnings for valuation support.

Bearish analysts, or those trimming targets, focus more on near term noise around guidance, inorganic contributions to ARR, and the risk that expectations have run ahead of visibility. This has led to a more balanced risk reward view even as ratings largely stay positive.

Bullish Takeaways

• Bullish analysts emphasize that organic ARR growth in Q1 was described as "very decent" and, even after backing out inorganic contributions, points to a healthy net new ARR trajectory that supports Zscaler's growth compounder narrative.
• The breadth of emerging product momentum, including Zero Trust Everywhere, AI Security, and Data Security, is seen as a key incremental growth engine that can extend the duration of elevated growth and justify premium valuation multiples.
• Several firms raised price targets and reiterated positive ratings, arguing that Zscaler's revenue beat and upward revision to full year guidance demonstrate solid execution against already high expectations.
• Across security and networking, bullish analysts view Zscaler as well positioned to benefit from rising enterprise security budgets and AI driven infrastructure changes, which could sustain above peer growth even if sector volatility remains elevated.

Bearish Takeaways

• Bearish analysts, while generally maintaining positive ratings, reduced price targets on concerns that the stock has already outperformed peers and that near term upside may be limited until investors receive more concrete data on ARR trends.
• Uneven disclosure around inorganic ARR contributions and the lack of clear quantification for recent acquisitions introduces uncertainty into growth quality, leading to more conservative valuation frameworks.
• Some see the Q1 guide and medium term outlook as only modestly improved relative to expectations, arguing that the bar for further rerating is higher given rich starting valuation and heightened AI driven crowding within software.
• A subset of cautious views suggests the potential for tactical pullbacks around seasonally slower quarters or if incremental data fails to confirm the current growth acceleration implied by recent target increases.

What's in the News

• Peraton and Zscaler formed a strategic partnership to deliver integrated Zero Trust based, cloud native security and network transformation solutions for mission critical government and enterprise environments, aiming to cut IT complexity, improve user experience, and lower total cost of ownership (Client Announcements).
• Orca Security expanded its partnership with Zscaler by integrating Zscaler Private Access with Orca's AI powered cloud risk intelligence to provide unified visibility across access and workloads, reducing alert fatigue and strengthening Zero Trust posture (Client Announcements).
• TPx selected Zscaler as the core Security Service Edge platform for its next generation SASE strategy, and plans a Managed SASE solution launch in early 2026 to unify SD WAN, secure web access, Zero Trust Network Access, and cloud app protection (Client Announcements).
• Zscaler issued fiscal 2026 guidance calling for ARR of about 3.7 billion dollars and revenue of roughly 3.28 billion to 3.30 billion dollars, with second quarter revenue expected at 797 million to 799 million dollars (Corporate Guidance).
• Zscaler unveiled new Zscaler Digital Experience innovations that use real time telemetry to cut issue detection times by up to 98 percent, reroute around ISP bottlenecks, and improve device level visibility to reduce digital downtime and extend hardware lifecycles (Product Related Announcements).

Valuation Changes

• Fair Value Estimate remained unchanged at 328.22 dollars per share, indicating no net impact from the updated assumptions.
• Discount Rate has risen slightly from 8.53 percent to 8.57 percent, modestly increasing the required return applied in the valuation model.
• Revenue Growth expectations have inched up from approximately 20.25 percent to 20.27 percent, reflecting a marginally more optimistic top line outlook.
• Net Profit Margin has edged down slightly from about 4.02 percent to 4.02 percent (4.015 percent), implying a very small reduction in long term profitability assumptions.
• Future P/E multiple has ticked up marginally from 379.0x to 379.9x, suggesting a slightly higher valuation being ascribed to expected earnings.