Zscaler Stock Fell 5% After Earnings. Is it Undervalued?

Zscaler released its fiscal fourth-quarter earnings report on Sept. 3. Here’s Morningstar’s take on Zscaler’s earnings and stock.

Key Morningstar Metrics for Zscaler

• Fair Value Estimate
  : $250.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Very High

What We Thought of Zscaler’s Fiscal Q4 Earnings

Zscaler reported fourth-quarter earnings including sales of $898 million, up 25%, and adjusted operating margins of 24%, up 200 basis points. The firm’s annual recurring revenue grew 25% to $3.8 billion.

Why it matters: Similar to its cyber peers, Zscaler is benefiting from a healthy cyber demand environment. Artificial intelligence models’ increasingly impressive cyber offense capabilities are expanding cyber defense budgets as enterprises improve their security infrastructures.

• We like the firm’s focus on focusing on security solutions that benefit from this secular tailwind, with AI security solutions’ bookings growing more than 50% this quarter. Also, 70% of these AI security wins also included data security modules, highlighting Zscaler’s growing platform.

The bottom line: We maintain our $250 per share fair value estimate for narrow-moat Zscaler, and with shares trading mostly flat after hours, we continue to view shares as undervalued.

• We think investors are still overly pessimistic about Zscaler’s top-line growth prospects in the face of increased competition from larger vendors. In our view, the security market is large enough to accommodate multiple winners, with Zscaler one of them.

Coming up: We see its 2027 17% sales outlook as conservative, considering the AI tailwind behind its business, improving sales productivity, and cross-selling success. Beyond 2027, we think growth will stay strong into 2028 as AI security becomes a larger part of the mix.

Bears say: Zscaler’s platform is still limited in breadth when comparing it with CrowdStrike and Palo Alto. This lack of breadth is a disadvantage during a period when customers are trying to consolidate security spending on fewer vendors.

• In our view, the firm is actively trying to move beyond network, with the Z-Flex model that allows customers to sign up for minimum commitments and try out different modules as a key part of expanding its product portfolio beyond network security.

The following are excerpts from Morningstar’s company report on Zscaler.

Fair Value Estimate for Zscaler

With its 4-star rating, we believe Zscaler stock is moderately undervalued compared with our long-term fair value estimate of $250, implying a 2027 enterprise value/sales multiple of 10 times. We forecast Zscaler’s revenue growing at a 16% compound annual growth rate over the next five years. As enterprises increasingly shift network traffic routing directly to cloud applications, we see massive greenfield opportunities for the firm to take advantage and grow its business.

Additionally, we think Zscaler’s “land-and-expand” model will continue to bear fruit. The firm has shown great success in upselling its existing customers by either offering additional modules within a platform or cross-selling Zscaler Private Access after initially landing with its Zscaler Internet Access offering. Going forward, we project continued up/cross-selling activity for the firm.

Read more about Zscaler’s fair value estimate.

Economic Moat Rating

We assign Zscaler a narrow Morningstar Economic Moat Rating, owing primarily to strong switching costs and secondarily to a network effect associated with its offerings. We believe Zscaler’s industry-leading zero-trust security solutions will continue to see robust enterprise adoption, allowing the firm to retain and expand its footprint within existing organizations while landing new customers. As a result, we forecast Zscaler to generate excess returns over invested capital over the next decade.

Read more about Zscaler’s economic moat.

Financial Strength

We view Zscaler’s financial position as healthy. The firm ended fiscal 2026 with around $3.5 billion in cash and liquid investments. While Zscaler carries debt of around $1.7 billion on its balance sheet, we believe the firm’s cash reserves, coupled with its ability to generate healthy cash flow, will cover its commitments over our explicit forecast. While the firm has not posted GAAP profitability, Zscaler’s adjusted operating margins have been in the black since 2018 and reached 23% in 2025.

We expect Zscaler’s profitability to improve as the firm increases its operating leverage by toning down some research and sales expenditures. Going forward, we do not expect to see a material change in Zscaler’s capital structure. In a tight macro environment, we expect the firm to raise capital by issuing more equity.

Read more about Zscaler’s financial strength.

Risk and Uncertainty

We assign Zscaler a Very High Uncertainty Rating, as it competes in the ever-shifting cybersecurity space. While Zscaler has positioned itself well to benefit from secular tailwinds like a shift to zero-trust security and the convergence of networking and security, the cybersecurity space is known for its rapid pace of development. A shifting demand landscape, coupled with newer products that impact Zscaler’s competitive positioning, is a risk for the firm.

With the high spending in its sales and research verticals, the firm is yet to achieve GAAP profitability. While we firmly believe in Zscaler’s long-term opportunity, we think that to reach the light at the end of the tunnel, Zscaler will have to execute well in the coming years.

Regarding environmental, social, and governance risks, we do not foresee any material issues. However, notable potential risks include attracting and retaining talent, which could demand high remuneration amid a talent shortage in cybersecurity. Also, Zscaler’s solutions are tasked with protecting customers from cyberattacks, making data privacy and security a key concern.

Read more about Zscaler’s risk and uncertainty.

ZS Bulls Say

• Zscaler has strong secular tailwinds, as the convergence of networking and the security market is in its early innings.
• Zscaler has market leadership and high enterprise penetration through its offerings related to secure web gateways and zero-trust network access.
• Consolidating security vendors should benefit Zscaler, which has a wide array of solutions across an enterprise’s network security stack.

ZS Bears Say

• Large public cloud vendors often offer their own cybersecurity solutions, which could hamper Zscaler’s growth opportunities.
• Zscaler faces competition from vendors like Palo Alto and Fortinet, which have increasingly invested in the key areas where Zscaler holds leading positions.
• There remains a risk that Zscaler may miss the next big technology, allowing competitors to catch up.

This article was compiled by Irza Waraich.