Morningstar

Zscaler Earnings: Disappointing Early Look at 2027 as Shares Sell Off

We’ve lowered our fair value estimate of Zscaler stock.

Building with logo for ZScaler in the Silicon Valley.
Smith Collection/Gado via Getty
Securities in This Article
Zscaler Inc
(ZS)

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 Earnings

Zscaler ZS reported strong third-quarter results, with sales and adjusted operating margins expanding 25% and 140 basis points to $851 million and 23%, respectively. Despite 25% annual recurring revenue growth in the quarter, the firm guided to 16.5% growth next year, leading to shares selling off.

Why it matters: We saw mixed signals in the report. There were clear positives, such as 30% of the firm’s new annual contract value coming from usage-based solutions and net new ARR accelerating to 24% growth.

  • This qualitative strength was juxtaposed with the disappointing guidance for sales and ARR growth, expected to be 16.5% in fiscal 2027, markedly short of what we modeled.
  • We still see green shoots that could help Zscaler turn around its top-line deceleration, including its burgeoning data security business, which is about 14% of the firm’s overall ARR and growing north of 30%.

The bottom line: We are reducing our fair value estimate for narrow-moat Zscaler to $250 per share from $300 as we reduce our near-term top-line growth estimates following management’s preliminary fiscal 2027 guidance.

  • We reduced our five-year top-line growth rate to 18% from 21%. We expect the firm’s sales deceleration to materially slow over the next five years as sales from newer offerings and usage-based solutions cover some weakness in legacy products.
  • With shares selling off around 20% after the firm’s earnings report, we view them as undervalued.

Coming up: We believe these drivers could recalibrate the market’s view of Zscaler:

  • Continued strength in usage-based solutions as ACV contributions grow and impact the firm’s top-line growth.
  • Z-Flex bookings, which were up 60% sequentially to more than $480 million in the third quarter, will drive Zscaler deeper into its customers’ IT infrastructure, enabling stronger top-line growth.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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