Should You Buy, Sell or Hold ZS Stock After a 46% Rise in 3 Months?

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2 days ago

Zscaler, Inc. ZS shares have climbed 46% in the past three months, outperforming the Zacks Security industry's return of 10.7%. ZS stock has also outperformed its industry peers, including CyberArk Software CYBR, Palo Alto Networks PANW and CrowdStrike CRWD. Shares of CyberArk, Palo Alto Networks and CrowdStrike have risen 8.3%, 4.8% and 23.2%, respectively, over the past three months.
With Zscaler's massive rise in the past three months, investors now face a key decision: Should they hold on to the stock or book a profit?
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Zscaler has achieved multiple milestones in 2025. ZS launched the Asset Exposure Management solution to enhance organizations' asset risk management capabilities. Zscaler has also partnered with SAP to integrate its Zero Trust Network Access service, Zscaler Private Access, within SAP's RISE framework. This integration will enable enterprises to reduce their reliance on traditional VPNs and firewalls and simplify cloud migrations while complying with evolving regulations.
ZS has also expanded its capabilities inorganically with the acquisition of Red Canary, which is a leading provider of Managed Detection and Response solutions in security operations. The organic and inorganic expansion of capabilities is enabling Zscaler to match the rising threats of nation-state cyber warfare, ransomware extortion and increasing incidents of malware attacks.
Zscaler is also enhancing its portfolio of offerings with the integration of artificial intelligence (AI) in its products. Zscaler partnered with NVIDIA and integrated NVIDIA's AI technologies, including NIM inference microservices, NeMo Guardrails and Morpheus framework into its Zero Trust Security model. Zscaler partnered with CrowdStrike to leverage CrowdStrike's AI expertise in SIEM, threat intelligence, cyber risk quantification and real-time insights.
With all these product and capability enhancements, the demand for Zscaler's cybersecurity solutions remains strong as reflected by its financials. In the third quarter of fiscal 2025, ZS attained a 12-month trailing dollar-based retention rate of 114%, driven by larger bundle sales and robust upsells.
Remaining Performance Obligations, which represent committed, non-cancelable future revenues, were boosted by 30% year over year. At the end of the third quarter, the company had 642 customers with $1 million or higher annualized recurring revenues (ARR). Zscaler's customer count for ARR of more than $100,000 reached 3,363 at the end of the third quarter.
Zscaler is rapidly enhancing its GovCloud solutions to receive approvals from the governing bodies. ZS is expanding its presence among government agencies through compliance with government security standards.
Zscaler has enabled numerous government agencies to utilize AI-powered Cloud Browser Isolation and IPv6 for secure connectivity, mainstreaming its GovCloud solution among its federal clients.
In the last reported quarter, Zscaler reported that it is serving 14 out of 15 U.S. cabinet-level agencies. As more government agencies use Zscaler's products, the company's presence in the public sector could expand, providing a stable growth stream.
Zscaler's recent inclusion in Amazon Web Services' Internet Control Message Protocol, which will ensure that Zscaler's cybersecurity solutions will now be readily accessible to U.S. federal agencies, furthers its reach among federal agencies.
Zscaler faces intense competition from other established cybersecurity players, including Palo Alto Networks, CyberArk and CrowdStrike. Zscaler Internet Access and Private Access face competition from Palo Alto Networks Prisma Access, Prisma SD-WAN, CrowdStrike Falcon Zero Trust, CyberArk Secure Web Sessions and CYBR Identity Security Platform.
To survive in the highly competitive cybersecurity market, Zscaler is continuously investing in broadening its capabilities. Over the past few years, ZS has invested heavily to enhance its S&M capabilities, particularly by increasing the sales force. Unfortunately, its aggressive investment in S&M and R&D might weigh on its near-term profitability.
Zscaler now expects its non-GAAP earnings per share for fiscal 2025 in the band of $3.18-$3.19. The Zacks Consensus Estimate for Zscaler's fiscal 2025 earnings is pegged at $3.06 per share, reflecting a 4% year-over-year decline.
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Zscaler holds a premium valuation, reflected in its Zacks Value Score of F. This is further reinforced by its Forward 12-month P/S ratio of 13.92X, significantly exceeding the Zacks Computer and Technology sector's average of 5.54X.
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Although Zscaler faces challenges related to increasing expenses, shrinking margins and premium valuation, the company's heavy investment in AI, innovative cybersecurity capabilities, customer retention and long-term contracts with government agencies make the stock worth retaining at present. Zscaler carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
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