Last Update 04 Sep 26
Fair value Increased 3.08%ZS: AI Security Budget Shifts And Tactical Underperform Risk Will Pressure Returns
Analysts have lifted the modeled fair value for Zscaler to about $149 from about $145, reflecting a mix of higher assumed revenue growth, a sharply lower profit margin input, and a much higher future P/E. This is framed against a series of recent price target increases and one tactically cautious view on the stock.
Analyst Commentary
Recent Street research on Zscaler shows a generally constructive tone on the stock, with several price target lifts clustered around the upcoming fiscal Q4 report and the company’s longer term recurring revenue outlook. At the same time, there is a clear split between more optimistic views that lean on security demand and AI related themes and more cautious voices that flag valuation sensitivity and execution risks into fiscal 2027.
On the supportive side, JPMorgan raised its price target to US$215 and kept an Overweight stance as part of a broader security software earnings preview. The bank highlighted accelerating security demand and suggested that conditions could improve later in the year for the wider group. Other firms also raised Zscaler targets into the US$192 to US$210 range while maintaining Buy or Overweight style ratings. These views often reference stable guidance around the company’s fiscal 2027 annual recurring revenue growth framework and healthy security spending trends based on channel checks and customer conversations.
Several research notes also point to themes that investors are closely watching. These include AI enabled security, Zero Trust adoption, cloud native security, data protection, and secure access. Some analysts see Zscaler as tied into broader trends in AI adoption and data modernization, and they connect that positioning to recent target revisions. Others emphasize continued strength in security budgets and partner feedback that points to solid demand, even as AI related projects increasingly influence how IT budgets are allocated.
Across the July and August research flow, there is also attention on sales execution, particularly after senior sales departures, and on how much of Zscaler’s annual recurring revenue growth could fall into the back half of the fiscal period. A few firms describe expectations for at least in line Q4 results with some potential upside to revenue and ARR, together with reaffirmed long term guidance. However, they also caution that consensus assumptions on free cash flow margins for fiscal 2027 may be too optimistic.
One research item stands out for its more cautious stance as Zscaler was placed on a "Tactical Underperform" list ahead of the September 3 fiscal Q4 report. That note points to channel work suggesting an in line quarter with limited visible upside and flags the possibility that fiscal 2027 ARR could land near the low end of the company’s initial 16% to 17% growth range. Another survey based report trimmed its price target to US$176 and pointed to widening gaps in IT budgets, with AI and AI readiness spending jumping in priority and potentially pressuring some software allocations.
Bearish Takeaways
- Bearish analysts highlight that Zscaler was moved onto a "Tactical Underperform" list ahead of fiscal Q4, signalling concern that the stock’s valuation may already reflect optimistic expectations into the print.
- Channel checks cited by bearish analysts suggest an in line Q4 with limited visible upside, which could pose a risk if the current share price already embeds expectations for stronger near term growth or positive surprises.
- Some cautious research points to fiscal 2027 ARR potentially tracking toward the low end of the 16% to 17% growth framework, which could pressure Zscaler’s growth narrative if investors are assuming outcomes closer to the high end.
- Survey work on IT budgets shows AI and AI readiness moving up the priority list, and bearish analysts warn this shift could constrain software spending in certain areas and create downside risk if Zscaler’s execution or product positioning does not keep pace with these changes.
What’s in the News for Zscaler
- Zscaler received Strong Buy style ratings from multiple analysts, including Wells Fargo with a US$210 price target and Stifel Nicolaus with a US$200 target. The average price target is around US$197.42, according to recent coverage sourced from Street research.
- The latest quarterly report showed revenue of US$850.48 million and a GAAP net loss of US$13.88 million. These figures continue to shape analyst views on Zscaler’s growth profile and profitability trade off, per the same research summaries.
- The company issued fiscal 2027 guidance that includes expected ARR of US$4.396b to US$4.426b and revenue of US$3.908b to US$3.938b, with both ARR and revenue growth guided to about 16.6% to 17.5%.
- Zscaler was removed from the NASDAQ 100 Index, a change that can affect index linked flows and how some portfolio managers gain exposure to the stock.
- Product and partner updates included an expansion of the Zero Trust SASE solution through the new ZAgent Framework and other security features, along with new integrations and partnerships with companies such as Gigamon, Oasis Security, Radiant Logic, Schwarz Digits, and Aston Martin Aramco Formula One Team.
Valuation Changes for Zscaler
- Fair Value has risen slightly, moving from about $145.00 to about $149.47 per share based on the updated model.
- Discount Rate is almost unchanged, shifting marginally from 8.74% to about 8.74% in the revised assumptions.
- Revenue Growth is modeled higher, moving from about 16.75% to about 17.82% in the latest forecasts for Zscaler.
- Net Profit Margin has fallen significantly in the model, dropping from about 12.11% to about 0.96%.
- Future P/E is now set much higher, moving from about 52.45x to a very large multiple above 600x, which reflects a major change in the valuation input.
Catalysts
About Zscaler
Zscaler provides cloud delivered security services that help enterprises protect users, data and applications.
What are the underlying business or industry changes driving this perspective?
- Although demand for AI security is helping AI Security ARR track toward the company’s internal $0.5b fiscal 2026 target, customers may slow adoption of newer modules like AI Guard and AI Red teaming if budgets stay tight, which would limit the step up in subscription revenue and temper operating leverage from this pillar.
- While Zero Trust Everywhere already has more than 450 enterprises and is being pulled into branches and cloud workloads as companies move off legacy firewalls and VPNs, many of Zscaler’s roughly 4,400 enterprise customers are still early in this journey. Any delay in branch refresh or SAP RISE projects could therefore stretch out upsell timing and keep ARR growth closer to the core ZIA/ZPA run rate, affecting both revenue and free cash flow.
- Although the broad Zero Trust and data security platforms help customers consolidate multiple point products, CIO scrutiny on large deals may push buyers to phase deployments more slowly. This could cap near term expansion in data security ARR of about $450m and limit margin gains from higher attach of premium modules.
- Despite the company processing 0.5 trillion transactions daily and over 90 billion AI or ML transactions per month, the need to prioritize speed to market for new AI rich offerings over efficiency, as management has flagged, may keep gross margin near the current ~80% level for longer if infrastructure costs for AI use cases remain high.
- While acquisitions such as Red Canary, Avalor and SPLX broaden agentic SecOps and AI security capabilities, integration risk around products and go to market, together with management’s plan to invest aggressively against a large opportunity, could weigh on operating margin around the guided full year range and create volatility in earnings growth.
Assumptions
How have these above catalysts been quantified?
- This narrative explores a more pessimistic perspective on Zscaler compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
- The bearish analysts are assuming Zscaler's revenue will grow by 17.8% annually over the next 3 years.
- The bearish analysts assume that profit margins will increase from -2.4% today to 1.0% in 3 years time.
- The bearish analysts expect earnings to reach $50.0 million (and earnings per share of $1.02) by about September 2029, up from -$77.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $286.8 million.
- In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 662.5x on those 2029 earnings, up from -371.5x today. This future PE is greater than the current PE for the US Software industry at 31.0x.
- The bearish 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 8.74%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?
- AI Security is a clear growth focus, but the company is prioritizing speed to market over efficiency for these newer products, and management has indicated this is already influencing the gross margin around 80%. If AI rich offerings keep using more infrastructure without offsetting pricing power, long term gross margins and earnings could come under pressure.
- Zero Trust Everywhere and Zero Trust Branch depend on customers replacing legacy firewalls, VPNs, SD WAN and other branch hardware. CIOs are still working with tight IT budgets and scrutinizing large deals, so slower project rollouts or a pullback in branch and cloud refresh plans could weigh on ARR growth and future revenue.
- The company is leaning heavily into acquisitions such as Red Canary, Avalor and SPLX to build out Agentic SecOps, data fabric and AI security capabilities. Although early integration is described as on track, there remains execution risk around product integration and go to market alignment, which could add cost and limit operating margin improvement and free cash flow if synergies take longer to show up.
- Data Security Everywhere has grown into roughly US$450m of ARR and is pitched as a broad platform that replaces multiple point products. If enterprises continue to mix and match specialist vendors for data security or AI security rather than standardizing on a single platform, Zscaler’s upsell potential across its 8 data modules could be lower than expected, affecting subscription revenue growth and operating leverage.
- Management plans to “invest aggressively” to pursue what it describes as a large market and to extend into areas like agentic operations and AI security. This could keep operating expenses growing faster than some investors expect, so if revenue growth moderates from the current low to mid 20% range while spending stays elevated, operating margin and earnings per share targets may be harder to sustain.
Valuation
How have all the factors above been brought together to estimate a fair value?
- The assumed bearish price target for Zscaler is $149.47, which represents up to two standard deviations below the consensus price target of $199.34. This valuation is based on what can be assumed as the expectations of Zscaler's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
- 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 more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $5.2 billion, earnings will come to $50.0 million, and it would be trading on a PE ratio of 662.5x, assuming you use a discount rate of 8.7%.
- Given the current share price of $177.8, the analyst price target of $149.47 is 19.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
- 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.
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AnalystLowTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystLowTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystLowTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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