Is Zscaler's Discounted Valuation a Buying Opportunity or a Value Trap?
Zscaler Inc.ZS looks cheap compared with other cybersecurity stocks. The company currently trades at around 36.67 times forward earnings, well below the 116.72 times for the broader Zacks Security industry.
The discount is even more noticeable compared with major cybersecurity peers like Fortinet, Inc.FTNT, Palo Alto Networks, Inc.PANW and CrowdStrike Holdings, Inc.CRWD. Fortinet trades at 43.81 times forward earnings, Palo Alto Networks at 88.42 times and CrowdStrike at 152.42 times.
At first glance, this valuation gap may look like an opportunity to buy a high-quality cybersecurity stock at a bargain price. However, investors should not confuse a lower valuation with an attractive investment. Zscaler stock is cheap for a reason, and the company's slowing growth makes it difficult to call the current valuation a clear buying opportunity.
Why Is Zscaler Trading at a Discount?
The biggest reason is Zscaler's sharp stock price decline.
ZS shares have plunged 37.8% over the past year, while the industry has surged 85.9%. The contrast with its major peers is even more striking. CrowdStrike, Fortinet and Palo Alto Networks have soared 101.1%, 114% and 116.3%, respectively, during the same period.
Zscaler One-Year Price Return Performance
Image Source: Zacks Investment Research
This huge performance gap suggests that investors have become increasingly concerned about Zscaler's growth story.
The key issue is not that Zscaler is losing revenues or customers. Rather, its growth is slowing much faster than investors had expected.
For years, Zscaler delivered revenue growth of more than 40%. That pace has now fallen to the mid-20% range, and management expects another significant slowdown in fiscal 2027. The company is forecasting roughly 16% revenue growth and 17% ARR growth for fiscal 2027.
Zscaler Quarterly ARR and Revenue Growth Trend
Image Source: Zscaler, Inc.
This is a major change for a company that was once valued as one of the fastest-growing names in cybersecurity. Management has pointed to several reasons for the weaker outlook, including changes in sales leadership, more cautious assumptions about new customer additions and a slower-than-expected contribution from the Red Canary acquisition.
Image Source: Zacks Investment Research
This suggests that Zscaler's valuation may be lower, but its growth expectations have also fallen sharply.
Higher Spending Adds Another Layer of Risk for ZS
Zscaler is also facing rising infrastructure costs.
The rapid adoption of artificial intelligence (AI) is creating new cybersecurity opportunities, but it is increasing the cost of the technology needed to support these workloads. Higher prices for memory, processors, storage and networking equipment are pushing Zscaler's capital spending higher.
Management now expects capital expenditures to reach the high-single-digit percentage of revenues in fiscal 2026 compared with its earlier expectation of the mid-single-digit percentage. Fiscal 2027 capital expenditures could rise by another 200 basis points from the 2026 level.
Higher spending is not necessarily bad if it produces stronger growth. The concern is that Zscaler is increasing investment at a time when it expects slower revenue and ARR growth for fiscal 2027.
Macroeconomic uncertainty, tariffs and geopolitical tensions add to the near-term risks. These factors could keep customers cautious about technology spending and make it harder for Zscaler to regain its previous growth rate.
Conclusion: Exit From Zscaler Stock for Now
Zscaler's valuation looks attractive on the surface, but cheap does not necessarily mean undervalued.
The stock's low forward earnings multiple reflects genuine concerns about slowing revenue and ARR growth, higher capital spending and uncertainty surrounding the company's ability to execute its growth strategy. The sharp underperformance compared with CrowdStrike, Fortinet and Palo Alto Networks also shows that investors have lost confidence in the near-term story.
Given the sharp slowdown in growth, rising spending requirements and continued execution risks, it is prudent to exit Zscaler stock for now. Investors can revisit ZS later if growth stabilizes, AI security gains traction and management demonstrates that it can return the company to a stronger growth trajectory.
Currently, Zscaler carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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