Zscaler, Inc. (ZS): A Bear Case Theory

We came across a bearish thesis on Zscaler, Inc. (ZS) on Substack by Magnus Ofstad. In this article, we will summarize the bears’ thesis on ZS. Zscaler, Inc. (ZS)’s share was trading at $205.20 as of March 21^st. ZS’s forward P/E was 70.42 according to Yahoo Finance.

Zscaler (ZS) is a leader in AI-driven cybersecurity, specializing in Zero Trust and Secure Access Service Edge (SASE) architectures. Its Zero Trust Exchange platform leverages AI-powered threat intelligence to provide real-time risk scoring and automated security policy adjustments. With over 8,000 customers, including 40% of Fortune 500 companies, Zscaler has demonstrated strong market adoption. Cybersecurity remains a board-level priority, making the sector relatively resilient to economic fluctuations. However, despite its strong fundamentals, Zscaler’s stock performance has been lackluster, trading between $153 and $218 over the past year. In fiscal year 2024, the company generated $2.17 billion in revenue, reflecting 34% growth, yet its guidance for fiscal year 2025 projects only 22% revenue growth at $2.65 billion, signaling a notable deceleration.

Zscaler estimates a total addressable market (TAM) of $100 billion, yet its revenue slowdown has raised concerns among investors. While the company retains a long growth runway, increasing competition, particularly from Palo Alto Networks, may be contributing to the weaker growth outlook. This slowdown has cast doubt on whether Zscaler can sustain its premium valuation. Despite strong margins, the combination of slowing revenue expansion and heightened competition suggests that the stock is overvalued. Using a 9% discount rate, a fair value estimate of $180 per share is derived, indicating that the current market price does not offer an attractive risk-adjusted return. While Zscaler remains a key player in cybersecurity innovation, its valuation appears stretched, warranting caution for investors.

Zscaler, Inc. (ZS) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 52 hedge fund portfolios held ZS at the end of the fourth quarter which was 52 in the previous quarter. While we acknowledge the risk and potential of ZS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ZS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article was originally published at Insider Monkey.