Zscaler’s Earnings Disappointment: A Buying Opportunity in a High-Growth Sector?

The cybersecurity sector has long been a magnet for growth investors, driven by relentless digital transformation and the escalating sophistication of cyber threats. Zscaler (NASDAQ: ZS), a leader in cloud security and zero-trust architecture, has consistently positioned itself at the forefront of this evolution. However, recent earnings reports have sparked debate: Is Zscaler’s stock undervalued despite its strong financials, or does the market’s skepticism warrant caution?

Earnings Beat and Operational Strength

Zscaler’s Q2 2025 results underscore its resilience. Revenue surged 21.3% year-over-year to $719.2 million, surpassing analyst estimates of $707.7 million [1]. Non-GAAP net income per share reached $0.89, outpacing the $0.80 consensus [1]. Annual Recurring Revenue (ARR) hit $3.02 billion, a 22% increase from the prior year [4], while billings grew 32% to $1.2 billion [4]. These figures reflect robust demand for Zscaler’s AI-driven security solutions, particularly in an era where enterprises are prioritizing proactive threat detection.

Operating efficiency also improved markedly. The company’s non-GAAP operating margin expanded to 22%, up from 20% in Q2 2024 [1], and free cash flow margin hit a record 22% [2]. Gross margin remained stable at 80.4%, despite rising operating expenses (up 19% YoY to $380 million) [2]. This balance between growth and profitability is rare in high-growth tech stocks, suggesting Zscaler’s scale is beginning to offset its aggressive R&D and sales investments.

Valuation Realism: A Discounted Peer?

Zscaler’s valuation metrics appear compelling. Its price-to-sales (P/S) ratio of 10.82 is below the cybersecurity industry average of 12.95 [3], indicating a relative discount. While the company’s GAAP P/E ratio is negative (-996.28) due to a net loss in the reporting period [4], non-GAAP metrics tell a different story. Analysts have set an average price target of $307.00, with a median of $330.00, implying a 12–23% upside from its current price of $268.25 [1]. RBC Capital recently raised its target to $335, citing Zscaler’s ARR growth and AI security innovations [4].

The disconnect between GAAP and non-GAAP valuations highlights a common challenge for high-growth tech firms: short-term accounting noise versus long-term cash flow potential. Zscaler’s free cash flow margin of 22% [2] and $2.88 billion in cash reserves [1] suggest it is well-positioned to sustain reinvestment without diluting shareholders.

Long-Term Growth: Riding the Cybersecurity Wave

The global cybersecurity market is projected to grow at a compound annual rate of 14.4% from 2025 to 2032, reaching $562.77 billion [1]. This expansion is fueled by AI integration, regulatory pressures, and the proliferation of cloud-based threats. Zscaler’s focus on zero-trust architecture and AI-driven threat detection aligns directly with these trends. Its Q3 2025 revenue guidance of $665–$667 million (20–21% YoY growth) [2] further signals confidence in maintaining its market leadership.

Analyst sentiment reinforces this optimism. Of 38 Wall Street analysts, 34 issued “Buy” ratings, and 12 “Hold,” with no “Sell” ratings [1]. Morgan Stanley’s recent upgrade to “Overweight” and a $385 price target [2] reflect growing conviction in Zscaler’s ability to capitalize on secular tailwinds.

Is This a Buying Opportunity?

The term “earnings disappointment” may be misleading here. Zscaler’s Q2 results exceeded expectations across revenue, profitability, and guidance, yet its stock price remains below the average analyst target. This undervaluation could stem from short-term market jitters—such as rising bond yields in late August 2025 [2]—rather than fundamental weaknesses.

For investors with a multi-year horizon, Zscaler’s combination of revenue growth, margin expansion, and a discounted P/S ratio offers a compelling case. The company’s ARR trajectory ($3.02 billion in Q2 2025) and market positioning in AI security suggest it is well-placed to outperform as the cybersecurity sector matures. However, risks remain, including macroeconomic volatility and competition from legacy players like Palo Alto Networks and CrowdStrike.

Conclusion

Zscaler’s Q2 2025 earnings reinforce its status as a high-conviction play in the cybersecurity sector. While its GAAP metrics may raise eyebrows, non-GAAP performance and analyst optimism paint a picture of a company balancing growth with efficiency. At a P/S ratio below industry peers and with a 22% free cash flow margin, Zscaler appears undervalued relative to its long-term potential. For investors willing to look beyond short-term noise, this could be a rare opportunity to invest in a leader navigating one of the most critical tech megatrends of the decade.

**Source:[1] Zscaler Inc (ZS) Q2 2025 Earnings Call Highlights [https://finance.yahoo.com/news/zscaler-inc-zs-q2-2025-071153514.html][2] Zscaler (ZS) Earnings Date and Reports 2025 [https://www.marketbeat.com/stocks/NASDAQ/ZS/earnings/][3] How to Play Zscaler Stock After Upbeat Q2 Earnings [https://www.nasdaq.com/articles/how-play-zscaler-stock-after-upbeat-q2-earnings-performance][4] Zscaler (ZS) Financial Ratios [https://www.investing.com/equities/zscaler-inc-ratios]