ZS

What They Do

Zscaler operates the world's largest security cloud, providing cybersecurity services that protect companies' internet traffic, applications, and data without requiring traditional hardware firewalls or VPNs. They serve over 4,400 enterprise customers by routing their internet traffic through Zscaler's global cloud platform, generating revenue through subscription-based security services. Think of them as the "security toll booth" for the modern internet—every click, download, and data transfer gets screened for threats before reaching users.

Investment Thesis

Key Risks

Growth Story

Revenue is expected to grow 24% in fiscal 2026 to $3.3B, driven by AI security adoption and customers expanding from basic internet security to comprehensive zero trust platforms. The company's ARR reached $3.4B (+25% YoY) with accelerating momentum in large deals and platform consolidation trends. Management sees a multi-year runway as enterprises replace traditional security architectures with cloud-native solutions.

Profitability Profile

Zscaler demonstrates strong unit economics with 77% gross margins and expanding operating leverage—operating margins improved 50bps to 22% as revenue growth outpaced expense growth. The company generates healthy free cash flow margins of ~21% and expects this to expand to 26-27% by fiscal year-end as they scale their cloud infrastructure investments. They've achieved a "Rule of 62" performance (revenue growth + FCF margin), indicating efficient growth.

Competitive Position

Zscaler pioneered the Security Service Edge (SSE) market and maintains the largest global security cloud with unmatched scale for processing internet traffic. Key competitors include legacy players like Palo Alto Networks and emerging cloud-native vendors, but Zscaler's 15-year head start in cloud architecture and AI security capabilities provide meaningful differentiation. Their platform approach increasingly wins against point solution vendors as customers seek consolidation.

Recent Momentum

Q2 fiscal 2026 results showed strong execution with revenue and EPS beats across all metrics, leading management to raise full-year guidance. The quarter featured record performance in $1M+ deals and accelerating adoption of new AI security products. Net new ARR growth reaccelerated to 10% in the first half versus 1% in the prior year, signaling improved sales execution and market demand.

What Wall Street Thinks

Analysts remain generally bullish on Zscaler's long-term positioning in AI security and zero trust, though some express concern about growth rate sustainability and increasing competition. The consensus focuses heavily on the company's ability to maintain premium pricing while expanding into adjacent markets. Recent earnings beats and raised guidance have reinforced confidence in near-term execution.

The Bottom Line

Zscaler is the category-defining leader in cloud security positioned at the intersection of two massive trends—AI adoption and zero trust architecture—but investors need to watch whether the company can reaccelerate growth while maintaining its competitive moat against intensifying competition.