Zscaler Declines 16% YTD: Will the Stock Make a Turnaround in 2025?

Zscaler, Inc. ZS, a leading provider of Zero Trust cybersecurity solutions, has seen its stock decline 16.1% year to date (YTD), underperforming the broader market, including the Zacks Computer and Technology sector and the S&P 500. The stock has also underperformed its peers in the cybersecurity space, including Fortinet, Inc. FTNT, Palo Alto Networks, Inc. PANW and Cisco Systems, Inc. CSCO over the same time frame.

YTD Price Return Performance

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While Zscaler stock’s underperformance has raised concerns among investors, a deeper dive into the company’s fundamentals and growth prospects reveals an investment opportunity. With significant tailwinds in cybersecurity, robust financials and expanding market opportunities, Zscaler may be poised for a turnaround in 2025.

Why Is Zscaler Stock Underperforming?

The decline in Zscaler’s stock price this year can be attributed to broader macroeconomic concerns, including high inflation, elevated interest rates and tightening enterprise IT budgets. Increasing competition in the Zero Trust cybersecurity space from players like Fortinet, Palo Alto Networks and Cisco has added pressure.

Zscaler's premium valuation has also made it vulnerable to market corrections, particularly as investors rotated out of high-growth tech stocks amid fears of a potential slowdown. However, these factors do not overshadow the company’s long-term growth potential.

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Zscaler’s Leadership in Zero Trust Cybersecurity

Zscaler continues to dominate the Zero Trust cybersecurity landscape with its highly scalable Zero Trust Exchange platform. The company’s ability to provide secure access to cloud applications and data across distributed environments aligns perfectly with the growing adoption of hybrid work models and cloud-native architectures.

According to a Fortune Business Insights report, the Zero Trust security market is projected to witness a compound annual growth rate (CAGR) of more than 17.1% through 2030, driven by rising cyber threats and regulatory mandates for robust security solutions. As an established leader in this space, Zscaler is well-positioned to capture a significant share of this expanding market.

Zscaler’s Innovation and Product Expansion

Zscaler’s commitment to innovation is a critical driver of its long-term growth. The company recently introduced AI-powered threat detection capabilities to its Zero Trust Exchange, enabling real-time risk assessment and remediation.

Its investments in generative artificial intelligence (AI) and advanced analytics position Zscaler as a frontrunner in delivering cutting-edge cybersecurity solutions. The expansion into high-growth verticals such as Zero Trust SD-WAN and 5G security opens new avenues for growth.

Zscaler’s Strong Financial Performance

Despite macroeconomic headwinds, Zscaler’s financial results remain robust. In the first quarter of fiscal 2025, revenues grew 26% year over year to $628 million, driven by strong customer demand for its Zero Trust solutions. The company’s Emerging Products segment, which includes solutions for Zero Trust SD-WAN and workload protection, grew twice as fast as its core offerings, highlighting its ability to diversify revenue streams.

Zscaler also delivered a record operating margin of 21%, reflecting its disciplined cost management and scalability of operations. Non-GAAP earnings jumped 40% year over year to 77 cents per share, driven by higher revenues and efficient cost management. These results underscore the company’s ability to generate sustainable growth even in challenging economic conditions.

Zscaler’s focus on expanding its footprint among large enterprises is bearing fruit. At the end of the first quarter, the company had 585 customers with $1 million or higher annualized recurring revenues (ARR). The company added more than 65 customers during the quarter, with $5 million or more in ARR. Zscaler’s customer count for ARR of more than $100,000 reached 3,165 at the end of the first quarter.

At the end of the first quarter, approximately 45% of the Fortune 500 companies and more than 35% of the Global 2000 companies are using Zscaler’s solutions. The company’s high net dollar retention rate of 114% indicates strong customer loyalty and the potential for upselling additional services.

Zscaler’s robust first-quarter performance has boosted analysts’ confidence. The Zacks Consensus Estimate for fiscal 2025 and 2026 earnings has witnessed upward revision over the past 30 days.

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Zscaler’s growth is likely to be fueled by continued enterprise migration to cloud environments, increased adoption of AI-powered cybersecurity solutions, rising regulatory mandates for Zero Trust architectures and recovery in enterprise IT spending as macroeconomic conditions stabilize. The company’s focus on large-scale deals with Fortune 500 and Global 2000 enterprises is expected to accelerate revenue growth in 2025 and beyond.

Conclusion: Buy ZS Stock Now

While Zscaler stock has faced challenges in 2024, the company’s strong fundamentals and strategic positioning in the high-growth Zero Trust cybersecurity market make it a compelling investment for 2025. Its innovative solutions, expanding customer base and operational efficiency provide a solid foundation for future growth.

Investors seeking exposure to the cybersecurity sector should consider Zscaler a long-term play. The stock’s potential for a turnaround in 2025, driven by market recovery and robust demand for its solutions, makes it a buy for now. ZS stock carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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