Is Zscaler’s Earnings Decline a Buying Opportunity Amid Strong Revenue Growth?

The debate over Zscaler’s financial health has taken on a familiar refrain in high-growth tech stocks: Can a company with a GAAP net loss still represent a compelling value proposition if its revenue growth and operational metrics are robust? For Zscaler, the answer hinges on parsing the nuances of its Q2 fiscal 2025 results, where a 23% year-over-year revenue increase to $647.9 million [1] coexists with a GAAP net loss of $7.7 million—a stark contrast to the $28.5 million loss in the prior-year period [1]. This divergence invites a contrarian lens, one that weighs the company’s strategic execution against its accounting liabilities.

The GAAP vs. Non-GAAP Divide

Zscaler’s GAAP net loss, while technically a red flag, masks a more encouraging story in non-GAAP terms. Non-GAAP net income surged to $127.1 million in Q2 2025, a 28% year-over-year increase [4]. This improvement reflects disciplined cost management, as operating expenses rose 18.6% to $380.4 million—slower than the 23% revenue growth [3]. The company’s free cash flow margin hit a record 22% [4], a critical metric for investors prioritizing long-term sustainability over short-term accounting noise.

Yet the GAAP loss remains a hurdle. Critics argue that Zscaler’s reliance on non-GAAP metrics—such as excluding stock-based compensation and amortization—obscures its true financial health. Regulatory scrutiny over non-GAAP disclosures has intensified, with the SEC emphasizing the need for clearer GAAP reconciliations [1]. For Zscaler, this means investors must scrutinize whether its operational efficiency gains (e.g., a 2 percentage point improvement in operating margin to nearly 22% [4]) can persist without inflating non-GAAP figures.

Strategic Momentum and Market Positioning

Zscaler’s growth is underpinned by its leadership in the Zero Trust security paradigm, a market expected to expand as enterprises digitize. The company’s 115% net retention rate [4] and 57% of purchases from new customers [4] suggest strong cross-selling and market penetration. Strategic initiatives, such as the Zero Trust Branch solution and the Nokia migration to its Zero Trust Exchange [1], further solidify its position. These moves align with broader industry trends, including AI-driven threat detection and hybrid cloud adoption, which Zscaler has integrated into its platform [2].

However, the question remains: Is Zscaler’s pricing power sufficient to offset its high operating expenses? At 58.7% of revenue [3], operating expenses remain elevated, though the year-over-year growth rate has moderated. This raises concerns about scalability—can Zscaler maintain its 23% revenue growth while reducing OpEx to a more sustainable level? The answer may lie in its deferred revenue, which grew 25% year-over-year to $1.88 billion [1], indicating strong customer commitment.

Valuation and Guidance: A Contrarian’s Dilemma

Zscaler’s Q3 guidance of $665–667 million [1] and full-year 2025 revenue of $2.64–2.654 billion [2] suggest management remains confident in its trajectory. Yet the stock’s valuation—trading at a price-to-sales multiple of 10x (as of August 2025)—appears modest for a company with 23% revenue growth. This disconnect between fundamentals and price hints at a potential buying opportunity for contrarian investors who prioritize long-term growth over near-term accounting quirks.

Risks and Reconciliations

The primary risk lies in Zscaler’s GAAP net loss, which could resurface if non-GAAP adjustments are reversed or if operating expenses spike. Additionally, the company’s focus on non-GAAP metrics may deter risk-averse investors who prioritize GAAP transparency. For Zscaler to fully realize its potential, it must demonstrate that its operational improvements are structural, not cyclical.

Conclusion

Zscaler’s Q2 results present a classic case study in high-growth tech investing: a company with explosive revenue growth, improving margins, and strategic momentum, yet burdened by GAAP accounting liabilities. For contrarian investors, the key is to separate the signal from the noise. If Zscaler can sustain its 22% free cash flow margin [4] and continue scaling its Zero Trust ecosystem, its GAAP net loss may be a temporary artifact rather than a red flag. The challenge, as always, is timing the market’s eventual recognition of this reality.

**Source:[1] Zscaler Reports Second Quarter Fiscal 2025 Financial Results [https://ir.zscaler.com/news-releases/news-release-details/zscaler-reports-second-quarter-fiscal-2025-financial-results][2] Zscaler Reports Second Quarter Fiscal 2025 Financial Results [https://ir.zscaler.com/news-releases/news-release-details/zscaler-reports-second-quarter-fiscal-2025-financial-results][3] Zscaler Q2 Earnings Beat: Will Strong Guidance Lift the ... [https://www.nasdaq.com/articles/zscaler-q2-earnings-beat-will-strong-guidance-lift-stock][4] Zscaler Inc (ZS) Q2 2025 Earnings Call Highlights [https://finance.yahoo.com/news/zscaler-inc-zs-q2-2025-071153514.html]