While Zscaler(NASDAQ: ZS) stock has had a strong run this year, the momentum shifted after the cybersecurity company reported its fiscal 2025 fourth-quarter results following the close of trading Tuesday. Though the period’s numbers were good, and management issued upbeat guidance, the stock sank 4% in Wednesday trading. However, even after the pullback, the stock is still up by about 50% year to date.
Let’s take a closer look at the company’s results and guidance to see if Wednesday’s dip has created a buying opportunity.
While endpoint cybersecurity companies like CrowdStrike(NASDAQ: CRWD) and Palo Alto Networks(NASDAQ: PANW) tend to get more attention from investors, Zscaler has carved out an important niche in a fast-growing part of the cybersecurity sector. It’s focused on zero trust security, which is built around the idea that no individual user or device should automatically be trusted, even if it was previously found to be trustworthy. That means that all users’ access to various platforms must be verified, authorized, and then regularly revalidated.
The rise of artificial intelligence (AI) and AI agents, meanwhile, has only added to the complexity of the cyberthreat landscape. This is leading to growth in newer areas for Zscaler, including AI Security, Zero Trust Everywhere, and Data Security Everywhere, which combined to exceed $1 billion in annual recurring revenue (ARR) in its fiscal Q4, which ended July 31. The company is also working on solutions to secure agent-to-agent and agent-to-application communications.
All of this helped Zscaler achieve robust revenue growth. In the quarter, its revenue climbed 21% year over year to $719.2 million, easily surpassing management’s prior guidance for revenue of between $705 million and $707 million. Adjusted earnings per share (EPS) climbed to $0.89 from $0.72 a year earlier. That was also well ahead of the company’s $0.79 to $0.80 forecast.
Zscaler generated operating cash flow of $250.6 million and free cash flow of $171.9 million. It ended the period with $3.6 billion in cash and short-term investments on its balance sheet and $1.7 billion in debt in the form of convertible notes. It also completed the acquisition of managed detection and response specialist Red Canary for an undisclosed sum right after the quarter ended, so that cash position is likely to come down.
Image source: Getty Images
Zscalar’s calculated billings — the amount invoiced to customers, and a potential indicator of future revenue growth — surged by 32% year over year to $1.2 billion. Deferred revenue — money the company has received for services that it has not yet delivered — jumped by 30% to $2.47 billion. Both these metrics are indications that revenue growth could begin to accelerate in the new fiscal year.
Management forecast that fiscal 2026 revenue would be between $3.265 billion and $3.284 billion, which would amount to approximately 22% to 23% growth. Red Canary is projected to add about $90 million in revenue. ARR is projected to be between $3.676 billion and $3.698 billion, also equal to growth of 22% to 23%. The guidance range for adjusted EPS was $3.64 to $3.68.
For its fiscal 2026’s first quarter, Zscaler guided for revenue of between $772 million and $774 million with adjusted EPS of between $0.85 and $0.86.
Metric
Fiscal Q1 Guidance
Fiscal 2026 Guidance
Revenue
$772 million to $774 million
$3.265 billion to $3.284 billion
Revenue growth
23%
22% to 23%
Adjusted EPS
$0.85 and $0.86
$3.64 to $3.68
Calculated billings
N/A
$3.676 billion to $3.698 billion
Data source: Zscaler.
Zscaler turned in a solid quarter, but what is even more promising is that metrics such as calculated billings and deferred revenue suggest that revenue growth should nicely accelerate in fiscal 2026. Moreover, while the company issued an upbeat outlook, historically, it tends to guide very conservatively, so revenue growth in the mid-to-high 20% range is possible.
The company is seeing nice momentum in new growth vectors, and the advent of AI agents could only add to this. Meanwhile, Zscaler has also taken a page out of CrowdStrike’s book by introducing its own flexible payment program, Z-Flex. Such programs let customers pay for and deploy modules only when needed. Zscalar introduced Z-Flex two quarters ago and saw a 50% increase in flex billings in fiscal Q4. This could be another growth driver for Zscaler.
Zscaler trades today at a forward price-to-sales multiple of about 13 based on analysts’ consensus estimates for the current fiscal year. Given that I think its revenue growth is likely to be around 25%, I think that is a fair multiple, but the stock isn’t in the bargain bin. Overall, given its valuation and prospects, I view Zscaler as a solid stock to hold although I’d prefer to be a new buyer after a further dip in price.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Zscaler. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
