Zscaler’s Q4 2025 Earnings Miss Marks Market Impact Amid Mixed Backtest Outcomes

Introduction

Zscaler (ZS), a leading player in cloud security, reported its Q4 2025 earnings on a challenging backdrop for IT services stocks. The cybersecurity sector has faced increasing pressure from macroeconomic headwinds, including rising interest rates and cautious corporate spending. Against this context, Zscaler’s earnings performance—while consistent with its historical trend of prioritizing growth over immediate profitability—has drawn attention for its operational trajectory and broader market implications. The report aligns with its peers in delivering modest short-term returns, but long-term investor confidence remains tied to execution and guidance.

Earnings Overview & Context

For Q4 2025, Zscaler reported total revenue of $2.17 billion, a robust figure that reflects continued demand for its cloud-native security solutions. However, the company posted a net loss of $57.7 million, with a basic and diluted EPS of -$0.39. Operating income also turned negative at -$25.5 million, indicating that the company is still investing heavily to maintain its competitive edge.

The earnings report also highlights the company’s operating expenses, including $1.31 billion in marketing, selling, and general administrative expenses, and $499.8 million in R&D. These outlays underscore Zscaler’s strategy of aggressive innovation and market expansion. Meanwhile, net interest income of $109.1 million offset a portion of expenses, resulting in a net interest expense of -$96 million.

The earnings miss—defined by a negative EPS—did not derail the stock entirely, but it did highlight the delicate balance between growth and profitability that Zscaler continues to manage. The results place the company in the typical pattern for its peer group, where near-term earnings pressures are often offset by long-term strategic investments.

Backtest Analyses

Stock-Specific Backtest

The backtest results for Zscaler reveal a mixed but generally positive post-earnings price reaction. Following earnings beats, ZS has a 66.67% win rate within 3 days and a 58.33% win rate at both 10 and 30 days. Short-term returns show modest gains, with an average of 0.83% over 3 days, though the 10-day period dips slightly into negative territory. By the 30-day mark, the average return rises to 2.20%, indicating a delayed but upward-moving investor response.

Moreover, the peak gain after an earnings beat can reach as high as 4.46% nearly two months post-announcement. These findings suggest that while the initial market reaction may be muted, a longer-term hold strategy could capture meaningful upside. Investors are advised to consider a 30-day horizon as a viable window for capturing potential gains post-earnings beat.

Industry Backtest

The IT Services sector, as a whole, has historically demonstrated a consistent positive response to earnings beats. Industry stocks typically see a maximum average gain of 2.11% around 51 days after a positive earnings surprise. This pattern suggests a strong and reliable upward trend within the sector following strong earnings, reinforcing the sector's appeal for investors who can maintain a medium-term horizon.

The sector’s consistent performance highlights the broader investor confidence in IT Services, particularly during earnings seasons, as companies demonstrate their ability to deliver value and adapt to evolving technological and economic conditions. This industry-wide trend may support Zscaler’s stock even when individual earnings reports fall short, as long as the company continues to execute its growth strategy effectively.

Driver Analysis & Implications

Zscaler’s earnings report underscores its continued investment in R&D and market expansion, with research and development expenses at $499.8 million and marketing and G&A expenses totaling $1.31 billion. These figures reflect a clear strategy to maintain leadership in the cloud security space, despite the company’s current unprofitable state. The net interest income, while modest at $109.1 million, helps alleviate some of the burden of these operating expenses.

From a macroeconomic perspective, the IT Services sector is being driven by the accelerating shift to cloud infrastructure and the increasing need for cybersecurity solutions. Zscaler is well-positioned to benefit from these trends, but its execution must continue to meet expectations in order to sustain investor confidence. The market’s mixed short-term reaction highlights the need for a balanced view of growth and profitability.

Investment Strategies & Recommendations

For short-term investors, the stock’s performance post-earnings suggests that a 30-day hold period is a reasonable strategy to capture positive returns following an earnings beat. However, the initial 10-day period may not be as reliable, and caution is advised in this timeframe.

Long-term investors, on the other hand, may find value in the broader IT Services sector’s consistent upward trend post-earnings beats. For Zscaler in particular, the focus should remain on guidance and execution of its growth strategy. A medium-term buy-and-hold approach aligns well with the historical performance of the sector and ZS’s own backtest data.

Given the company’s ongoing investments and market positioning, investors should consider aligning their strategies with a medium-term horizon to allow for the realization of its long-term value.

Conclusion & Outlook

Zscaler’s Q4 2025 earnings report reflects the company’s continued investment in growth and innovation, despite near-term unprofitability. The mixed but generally positive market response, supported by both stock- and sector-level backtests, underscores the potential for gradual appreciation, particularly over the medium term.

Looking ahead, the next key catalyst for Zscaler will be its Q1 2026 earnings, which will provide updated guidance and further insights into the company’s trajectory. Investors should monitor both the execution of its strategic initiatives and the broader sector performance to make informed decisions.