Zscaler's Growth Crossroads: Riding Momentum or Facing FY26 Headwinds?

Zscaler (NASDAQ: ZS) has emerged as a cybersecurity powerhouse, leveraging its cloud-native architecture to dominate a market increasingly besieged by evolving threats. Recent financial results underscore its momentum, but as the company eyes fiscal year 2026 (FY26), investors must weigh near-term triumphs against looming risks. Here's why Zscaler's stock presents a compelling opportunity—if you're willing to navigate its strategic crossroads.

The Near-Term Case for Optimism

Zscaler's Q1 2025 results were a masterclass in scaling revenue and operational efficiency. Revenue surged 26% year-over-year to $628 million, while deferred revenue—a key indicator of future cash flows—jumped 27% to $1.78 billion. This growth isn't just about top-line expansion; it reflects the platform's unmatched scalability. Zscaler now processes over half a trillion daily transactions, a figure 60 times greater than Google's daily search volume, proving its ability to handle the exploding demands of hybrid work and IoT-driven environments.

The company's non-GAAP net income rose 44% to $124.3 million, signaling profitability gains even as it invests in R&D and strategic acquisitions. Partnerships with CrowdStrike and Okta are also paying dividends, embedding Zscaler's AI-driven security into broader ecosystems. And with a Rule of 52 performance (revenue plus free cash flow margin exceeding . 50%), the company is outpacing the cybersecurity industry's “Rule of 40” benchmark.

Why FY26 Demands Caution (For Now)

While Zscaler's current trajectory is impressive, management's refusal to provide explicit FY26 guidance underscores uncertainty. Analysts are split on how to interpret this silence:

1. Growth Expectations vs. Reality
2. Analysts like Evercore's Peter Levine project 18.5% revenue growth for FY26, below the 20.2% consensus estimate, citing macroeconomic risks and integration hurdles from the $675M Red Canary acquisition.
3. The Red Canary deal aims to enhance Zscaler's AI-driven threat detection, but analysts warn that retaining only $70M of its ARR and absorbing integration costs could delay margin improvements.

1. Margin Pressures
   Zscaler's gross margin dipped to 80.3% in Q3 (down from 81.4% a year ago), as the company prioritized product launches over cost-cutting. While this aligns with its growth-first strategy, it raises concerns about FY26's ability to sustain profitability amid rising competition and IT spending delays.

2. Macroeconomic Uncertainties
   The Federal Reserve's policies and geopolitical tensions could stall enterprise spending, particularly for cloud security—a discretionary category for many firms.

The Catalysts to Watch

Zscaler's upcoming user conference and analyst briefing (date pending) will be pivotal. Investors need clarity on:
- Red Canary's integration timeline: Will it deliver the promised AI-driven SOC capabilities, or will synergies take longer than expected?
- FY26 guidance: Management may finally provide targets, easing concerns about growth sustainability.
- Margin trajectory: Can Zscaler stabilize gross margins above 80% while scaling its platform?

Valuation: A Discounted Opportunity?

Despite FY26 risks, Zscaler's valuation remains compelling. GuruFocus projects a $296 price target (17.97% upside from $251.11), while Evercore's $290 target reflects a 13.5x CY26 sales multiple—a discount to its historical premium. The stock's PEG ratio of 1.2 suggests it's pricing in growth but not overextending.

Final Analysis: A Strategic Buy with a Hold for FY26 Clarity

Zscaler's current performance is undeniable, but investors must tread carefully. The stock offers long-term upside via its dominance in cloud security, AI innovation, and sticky customer metrics (ARR growth, RPO expansion). However, the lack of FY26 guidance and Red Canary's risks justify a hold until Q4, when the user conference and Q4 results could clarify the path ahead.

Historically, a strategy of buying Zscaler on earnings announcement dates and holding for 20 days since 2020 delivered a total return of 30%, but with significant volatility and a maximum drawdown of nearly 40%. This underscores the importance of patience and risk management as FY26 unfolds.

Action Items:
- Buy if: FY26 guidance exceeds 18.5% growth, and Red Canary's integration is seamless.
- Wait if: Macroeconomic headwinds intensify, or margins deteriorate further.

Zscaler isn't just a cybersecurity play—it's a testament to the future of hybrid work security. For now, investors should capitalize on its momentum but stay alert for FY26's crossroads.

This analysis balances optimism with skepticism, urging investors to act strategically while monitoring key catalysts. Zscaler's story is far from over.