Zscaler, Inc. ZS has struggled to keep pace with the broader cybersecurity sector. The stock has fallen 0.6% over the past six months, while the broader Zacks Security industry has gained 84.8%.
The performance gap becomes even more striking when compared with major peers, including Palo Alto Networks, Inc. PANW, CrowdStrike Holdings, Inc. CRWD and Fortinet, Inc. FTNT. Palo Alto Networks, CrowdStrike and Fortinet have surged 103.5%, 93.4% and 87.3%, respectively, during the same period.
Zscaler 6-Month Price Return Performance
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This raises an important question for investors: Is Zscaler simply being overlooked, or is the weak stock performance signaling deeper problems
The numbers suggest the latter may be the bigger concern.
Zscaler’s Growth Story Is Losing Momentum
Zscaler's biggest problem is no longer its position in the cybersecurity market. It is the pace at which the business is growing.
For years, Zscaler was known for delivering revenue growth above 40%. That growth rate has steadily declined. In the fourth quarter of fiscal 2026 and for the full fiscal year, revenues increased 25% year over year. Annual recurring revenues (ARR) also rose 25% to $3.77 billion at the end of the fourth quarter.
While 25% growth is still respectable, it is a major slowdown for a company once viewed as one of the fastest-growing cybersecurity stocks.
ZS expects growth to weaken further in fiscal 2027. Zscaler is projecting roughly 17% growth in both revenues and ARR. Management has pointed to several reasons for the weaker outlook, including changes in sales leadership and execution uncertainties surrounding new product integrations.
The Zacks Consensus Estimate for fiscal 2027 revenue growth is in line with management’s guidance and points to another slowdown in fiscal 2028, with revenues expected to increase only 15.7%.
Zscaler Sales Estimates
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ZS’ Rising Spending Is Another Major Concern
Zscaler is also spending more to support its long-term growth plans. The rapid adoption of artificial intelligence (AI) is creating new opportunities for cybersecurity companies. However, AI workloads also require more computing, memory, storage and networking capacity. Rising infrastructure costs are putting additional pressure on Zscaler's spending.
Capital expenditures accounted for 8.3% of fiscal 2026 revenues, up from 6.1% in fiscal 2025. Management expects capital spending to remain elevated in fiscal 2027 and potentially reach the low-teens percentage of revenues.
Higher investment can be justified when it leads to faster growth. The problem for Zscaler is that spending is rising, while revenue and ARR growth are expected to slow.
Free cash flow also reflects this pressure. Zscaler's free cash flow margin declined to 23% in fiscal 2026 from 27% in fiscal 2025. Management expects the margin to remain around 23%-23.5% in 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.
Zscaler’s Cheap Valuation Could Be a Trap
Zscaler looks cheap compared with other cybersecurity stocks. The company currently trades at around 6.63 times forward 12-month sales, well below the 17.05 times for the broader Zacks Security industry.
Zscaler Forward 12-Month P/S Ratio
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The discount is even more noticeable compared with major cybersecurity peers like Fortinet, Palo Alto Networks and CrowdStrike. Fortinet trades at 13.19 times forward 12-month sales, Palo Alto Networks at 19.16 times and CrowdStrike at 31.63 times.
At first glance, this valuation gap looks like a bargain for a high-quality cybersecurity stock.
However, a low valuation does not automatically make a stock attractive. Investors often pay higher multiples for companies that can deliver stronger and more consistent growth. But Zscaler's growth continues to slow, which justifies its low valuation.
In other words, ZS stock is cheap because investors are already pricing in a weaker growth outlook.
Final Thoughts: Exit ZS Stock for Now
Zscaler remains a major cybersecurity company with significant long-term opportunities, particularly as AI and cloud adoption create new security challenges. However, the stock's current investment case is difficult to defend.
The company is facing slowing revenue and ARR growth, rising capital spending and weaker free-cash-flow margins. At the same time, Palo Alto Networks, CrowdStrike and Fortinet are delivering much stronger stock returns.
Zscaler’s discounted valuation is attractive on the surface, but it is not enough to offset the deterioration in growth. It is wise to exit Zscaler stock for now and wait for clearer evidence that growth is stabilizing.
Zscaler currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Zscaler, Inc. (ZS): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).