Zscaler's Q3 2025 Earnings: Navigating Near-Term Challenges with Strategic Vision

Zscaler (NASDAQ: ZS) is set to release its Q3 2025 earnings on May 29, offering a critical moment to assess whether its recent acquisitions and product innovations can offset slowing earnings growth. While declining EPS estimates have spooked some investors, the company's bold moves to expand its cybersecurity ecosystem—through acquisitions like Avalor and Airgap Networks—suggest a long-term play that could redefine its value proposition. For investors willing to look beyond the next quarter, ZS presents a compelling opportunity to buy the dip.

The EPS Dilemma: A Necessary Trade-Off?

Analysts currently project Q3 2025 EPS of $0.75, down from $0.88 in the same period last year. This decline reflects both macroeconomic pressures and Zscaler's strategic choices. The company has prioritized scaling its Zero Trust Exchange platform—a distributed, multi-tenant architecture that secures users, devices, and applications across 150+ global data centers—over short-term profit optimization.

While the EPS drop is undeniable, it's important to note that revenue remains robust. Q3 revenue is expected to hit $665–$667 million, up 23% year-over-year, driven by a 23% surge in annual recurring revenue (ARR) to over $2.7 billion. The net retention rate (NRR) of 115% further underscores customer loyalty. These metrics suggest that Zscaler is growing its base and deepening relationships, even as it invests in high-potential areas.

The Acquisitions: Building a Future-Proof Security Stack

The declining EPS narrative misses the bigger picture: Zscaler is architecting a cybersecurity ecosystem that combines its core cloud security platform with cutting-edge capabilities from Avalor and Airgap Networks.

• Avalor: Acquired in early 2025, this AI-driven security startup adds behavioral analytics and real-time threat detection to Zscaler's portfolio. Its technology identifies anomalies in user and device behavior, addressing a critical gap in Zero Trust architectures.
• Airgap Networks: This deal strengthens Zscaler's data center security, enabling it to protect critical infrastructure even in offline scenarios. Combined with its global data center network, this creates a multi-layered defense against advanced attacks.

These moves are not just cost center drains—they're strategic bets on expanding Zscaler's addressable market. By integrating AI, behavioral analytics, and offline security, ZS is positioning itself as the go-to platform for enterprises seeking unified, adaptive protection.

The Tipping Point: When Investments Pay Off

The key question is whether these acquisitions will translate into tangible revenue streams. Avalor's AI capabilities could drive upselling to existing customers, while Airgap's offline security could open doors in regulated industries like finance and healthcare. The company's SSMA (Single-Scan, Multi-Action) architecture, which reduces latency by 40%, further differentiates it in a crowded cybersecurity market.

Analysts' "Strong Buy" consensus (based on 35 ratings) reflects confidence in this strategy. With calculated billings projected to hit $3.15–$3.17 billion for FY2025—up 20% year-over-year—the top line is on track to support long-term growth.

Why Buy Now?

The market's focus on EPS misses three critical factors:
1. Valuation: At a forward P/E of 42 (vs. 50 in 2024), ZS is trading at a discount to its growth trajectory.
2. Competitive Moat: The Zero Trust Exchange's scale—150 data centers, 400+ patents—creates barriers to entry.
3. Execution Track Record: Zscaler has consistently delivered on strategic bets, such as its shift to SaaS billing, which boosted ARR by 23% in Q2.

Conclusion: A Compelling Buy at the Inflection Point

Zscaler's Q3 earnings will likely reaffirm its near-term EPS struggles, but investors should see this as a temporary hurdle. The company's acquisitions are not just defensive moves—they're offensive plays to dominate the $200B+ cybersecurity market. With a fortress balance sheet ($1.2B cash), a loyal customer base, and a product roadmap that's light-years ahead of rivals, ZS is a buy at current levels.

The earnings call on May 29 will be pivotal. Management's commentary on Avalor and Airgap's integration timelines, along with updated ARR and NRR guidance, could catalyze a rebound. For those willing to look beyond quarterly noise, ZS offers a rare chance to invest in a cybersecurity leader at a meaningful discount.

Historical performance around earnings dates underscores the importance of a long-term lens. A backtest of buying ZS five days before earnings and holding five days post-announcement from 2020 to 2025 showed an average return of -25.59%, with a maximum drawdown of -73.87%. This highlights the risks of short-term trading around earnings events, as losses have historically outweighed gains. Investors should instead focus on ZS's structural advantages: its expanding cybersecurity ecosystem, recurring revenue streams, and a valuation that now reflects its growth potential.

Action Item: Use the earnings report as a catalyst to enter or add to positions in ZS. Set a price target of $220–$250 by end-2025, aligning with consensus revenue growth and valuation multiples.

Disclosure: This analysis is for informational purposes only and does not constitute financial advice.