Zscaler to Post Q3 Earnings: Time to Buy, Sell or Hold the Stock?

Zscaler ZS is scheduled to report its third-quarter fiscal 2025 results on May 29, 2025.
Zscaler anticipates revenues between $665 million and $667 million for third-quarter fiscal 2025. The Zacks Consensus Estimate for ZS' fiscal third-quarter revenues is pegged at $666.1 million, indicating year-over-year growth of 20.4%.
For the fiscal third quarter, the company expects non-GAAP earnings per share in the band of 75-76 cents. The Zacks Consensus Estimate for ZS' fiscal third-quarter earnings is pegged at 75 cents per share, which remained unchanged over the past 60 days and indicates a year-over-year decline of 14.8%.
Zscaler's earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 24.55%. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)
Zscaler, Inc. Price and EPS Surprise
Zscaler, Inc. price-eps-surprise | Zscaler, Inc. Quote
Earnings Whispers for Zscaler
Our proven model does not conclusively predict an earnings beat for Zscaler this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is not the case here. You can see the complete list of today's Zacks #1 Rank stocks here.
Though Zscaler currently carries a Zacks Rank #3, it has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Factors to Note for Zscaler's Q3 Results
Zscaler's third-quarter results are expected to show sustained demand for its security and networking solutions, given the persistent expansion of the global security space. The adoption of ZS' in-cloud security solution, Zero Trust Exchange, driven by the ongoing digital transformation across organizations and the growing popularity of hybrid work, is likely to have been a key catalyst.
The growing adoption of Software-Defined Wide Area Network (SD-WAN) solutions might have acted as a primary driver in the fiscal third quarter. Per the latest Future Market Insights report, the market size for SD-WAN solutions and products is expected to reach $80.91 billion by 2034 from $5.36 billion in 2024, witnessing a CAGR of 31.6%. As only a select number of vendors offer security and SD-WAN solutions, Zscaler has been gaining from the increasing opportunities in this space. The company's partnerships with VMware and Silver Peak have enabled it to secure SD-WAN deliveries. This is expected to have aided Zscaler's fiscal third-quarter performance.
ZS' existing core products, mainly the Zscaler Internet Access and Zscaler Private Access, have been driving customer retention. The addition of new features to its Zero Trust Exchange, such as Cloud Access Security Broker, Cloud Browser Isolation, Cloud Protection, Zscaler Digital Experience and Cloud Security Posture Management for software-as-a-service applications, is expected to have driven its product portfolio expansion and customer acquisition. Generative AI and Agentic AI are also acting as a growth pillar for Zscaler. The company now serves 14 out of 15 U.S. cabinet-level agencies. This is likely to have provided stability to Zscaler's top line in the to-be-reported quarter.
Our model estimates for third-quarter revenues from Channel Partners and Direct Customers are pegged at $588 million and $77.4 million, respectively. We expect the remaining performance obligation at the end of the quarter to be approximately $4.65 billion.
However, as customers scrutinize large deals more closely, with continued tight IT budgets, Zscaler faces longer deal cycles. To counter this, Zscaler is growing investments to improve sales and marketing (S&M) capabilities and higher research and development (R&D) costs, which might have weighed on the company's fiscal third-quarter bottom line.
ZS Price Performance & Stock Valuation
Zscaler's shares have gained 40.9% year to date, outperforming the Zacks Security industry's growth of 16.9%. The stock has also outperformed its peers in the cloud-based security solution space, such as Palo Alto Networks PANW, CrowdStrike Holdings CRWD and CyberArk Software CYBR, which have risen 2.7%, 33.2% and 14.5%, respectively, in the same time frame.
Now, let's look at the value Zscaler offers investors at the current levels. ZS stock is trading at a discount with a forward 12-month P/S of 12.79X compared with the industry's 14.21X, reflecting an undervaluation.
Investment Thesis for Zscaler
Zscaler is benefiting from the rising demand for cybersecurity solutions due to the slew of data breaches. The increasing demand for privileged access security in digital transformation and cloud migration strategies is a key growth driver.
A strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, safeguards it from the negative impacts of ongoing macroeconomic headwinds. Portfolio expansion through acquisitions like Avalor, Canonic Security and ShiftRight is praiseworthy.
However, 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, Zscaler 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.
Conclusion: Hold ZS Stock for Now
While the long-term prospects for the company remain bright, the near-term challenges associated with its profit growth warrant caution.
Therefore, we believe that it's prudent to avoid making new investments in the stock for now. For existing shareholders, holding on to Zscaler stock is the best course of action, as the long-term growth drivers are still firmly in place.
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