Zscaler's Earnings Beat and Missed Billings: A Reassessment of Growth and Valuation

The recent performance of Zscaler (NASDAQ: ZS) has presented a paradox: despite a strong Q3 2025 earnings beat and robust revenue growth, the stock plummeted 10.9% post-announcement, sparking debates about its valuation and long-term potential. This volatility, however, may signal a contrarian opportunity for investors willing to look beyond short-term noise and focus on Zscaler's strategic positioning in the AI-driven cybersecurity landscape.

Earnings Beat and the Market's Contradictory Reaction

Zscaler reported Q3 2025 revenue of $788.1 million, a 25.5% year-over-year increase that exceeded analyst estimates by 1.9%. Non-GAAP earnings per share (EPS) of $0.96 outperformed expectations by 11.4%, while adjusted operating income of $171.9 million beat forecasts by 2.4% according to financial reports. The company also raised its full-year revenue guidance to $3.29 billion, reflecting confidence in its market position.

Yet, the stock dropped sharply after the report, a reaction that defies conventional logic. According to a report by Yahoo Finance, the decline was attributed to weaker-than-expected billings guidance and investor skepticism about the sustainability of Zscaler's growth. Calculated billings of $597 million grew 15.5% YoY but fell short of market expectations, raising concerns about decelerating demand. This disconnect between financial performance and market sentiment highlights a key question: Is the stock's pullback a mispricing opportunity, or a warning sign of underlying challenges?

Valuation Metrics: Elevated Multiples, Justified by Growth?

Zscaler's valuation remains a contentious topic. The company trades at a forward price-to-sales (P/S) ratio of 16.6x, significantly higher than the cybersecurity peer average of 15.6x. While this premium reflects its leadership in cloud security and AI-driven solutions, it also raises concerns about whether the market is pricing in overly optimistic expectations. Analysts at Koalagains note that Zscaler's trailing twelve months (TTM) free cash flow of $500 million is projected to grow to $2.25 billion by 2030, a trajectory that could justify its elevated multiples.

A discounted cash flow (DCF) analysis suggests Zscaler is trading near intrinsic value, with an implied fair price of $285.88 per share. However, its P/S ratio of 16.6x exceeds the industry average, indicating potential overvaluation if growth slows. This tension between growth potential and current multiples creates a compelling case for contrarian investors who believe in the company's ability to execute its AI security vision.

AI Security as a Strategic Catalyst

Zscaler's long-term growth hinges on its AI security strategy, a sector poised for explosive demand. The company's AI Security pillar grew 80% YoY in Q3 2025, driven by the integration of acquired technologies like Red Canary and SPLXAI. These acquisitions, totaling $692 million, have enabled Zscaler to secure the entire enterprise AI lifecycle on a single platform, a critical differentiator in an era of rapid AI adoption.

Management emphasized during the Q1 2026 earnings call that Zero Trust security is the linchpin for AI security, with CEO Jay Chaudhry stating the company's cloud-native architecture is "well-positioned to address emerging challenges in the AI era" according to official statements. Annual Recurring Revenue (ARR) from AI Security is on track to exceed $500 million by year-end, three quarters ahead of initial targets. This acceleration underscores Zscaler's ability to capitalize on the AI security boom, a market expected to expand as enterprises grapple with AI-related threats.

Contrarian Thesis: Volatility as a Buying Opportunity

The post-earnings selloff, while disheartening, may represent a mispricing of Zscaler's long-term prospects. The stock's 14.9% decline in the past month contrasts with its 51.4% year-to-date return and 98.2% gain over three years. Analysts at SimplyWall St argue that the drop has created an entry point for investors who recognize the company's structural advantages in AI security and Zero Trust adoption.

Key risks remain, including competition from established players like Palo Alto Networks and macroeconomic headwinds. However, Zscaler's 26% YoY revenue growth, combined with its strategic acquisitions and product innovation, positions it to outperform peers in the long run. The recent stock correction has brought its P/S ratio closer to historical averages, making it more attractive for investors with a multi-year horizon.

Conclusion

Zscaler's Q3 2025 results highlight a company navigating the dual pressures of market expectations and transformative growth. While the post-earnings selloff reflects short-term skepticism, the fundamentals-robust revenue growth, AI-driven innovation, and a strong balance sheet-suggest the stock is undervalued relative to its long-term potential. For contrarian investors, this volatility represents a rare opportunity to invest in a cybersecurity leader at a discount to its intrinsic value, with AI security serving as a powerful tailwind.