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

Zscaler (ZS) is expected to report fiscal Q3 2025 revenues between $665M and $667M, representing a 20.4% year-over-year increase, while non-GAAP EPS is projected at $0.75-0.76, a 14.8% year-over-year decline. Demand for Zscaler's security and networking solutions is driven by digital transformation and the adoption of SD-WAN, however, increased investments in sales & marketing and R&D to combat longer deal cycles may pressure near-term profitability, leading Zacks to recommend holding the stock for now despite long-term growth prospects.

Analysis

Zscaler (ZS) anticipates third-quarter fiscal 2025 revenues between $665 million and $667 million, aligning with the Zacks Consensus Estimate of $666.1 million, which suggests a robust 20.4% year-over-year growth. However, projected non-GAAP earnings per share of 75-76 cents, consistent with the consensus estimate of 75 cents, indicate a significant 14.8% year-over-year decline. This expected earnings contraction occurs despite Zscaler historically beating earnings estimates by an average of 24.55% over the trailing four quarters, though Zacks' current model (Earnings ESP of 0.00%) does not conclusively predict a beat this time. The company's top-line growth is supported by sustained demand for its Zero Trust Exchange platform amid ongoing digital transformation and hybrid work trends, further bolstered by the rapidly expanding SD-WAN market, projected to grow at a 31.6% CAGR to $80.91 billion by 2034. Zscaler's strategic partnerships, expanding product features, and strong footing in the U.S. public sector (serving 14 of 15 cabinet-level agencies) are key catalysts, with model estimates pointing to $588 million from Channel Partners and $77.4 million from Direct Customers, and a remaining performance obligation around $4.65 billion. Conversely, near-term profitability is challenged by longer deal cycles due to increased customer scrutiny on large IT expenditures and escalating investments in sales & marketing (S&M) and research & development (R&D) aimed at maintaining competitiveness against players like Palo Alto Networks, CyberArk, and CrowdStrike. Despite these pressures, Zscaler's stock has appreciated 40.9% year-to-date, outperforming the Zacks Security industry's 16.9% growth and peers, while trading at a forward 12-month P/S ratio of 12.79X, a discount to the industry average of 14.21X.

Key Decisions for Investors

• Investors should acknowledge Zscaler's strong revenue growth trajectory and favorable market positioning in cybersecurity, particularly within the SD-WAN and Zero Trust segments, but weigh this against the significant near-term pressure on profitability evidenced by the projected 14.8% YoY EPS decline.
• Given the anticipated margin compression from increased S&M and R&D spending, coupled with longer deal cycles and intense competition, a cautious stance is warranted; aligning with Zacks' 'Hold' recommendation, new investments might be deferred pending clearer signals of profit stabilization, while existing shareholders may consider maintaining positions due to long-term growth drivers.
• Monitor upcoming Q3 results closely for any deviation from revenue and EPS guidance, commentary on deal cycle durations, the impact of investments on margins, and management's outlook on navigating the competitive landscape and achieving sustainable profitable growth.