Zscaler set to benefit from federal tailwinds boosting fourth quarter outlook: analysts

Zscaler is expected to report a strong fiscal third quarter on May 26, with Jefferies modeling annual recurring revenue of $3.51 billion, up 24.6% year over year. The note suggests the cybersecurity company is well positioned to beat consensus ARR growth expectations. The article is supportive for Zscaler shares but is primarily analyst commentary, so the likely market impact is modest.

Analysis

The setup is less about the headline beat itself and more about what a clean ARR print would imply for the next two quarters: better billings visibility, easier comp optics into the second half, and higher confidence that large enterprise consolidation is still favoring best-in-class security platforms. If the company prints above the modeled ARR trajectory, the market is likely to re-rate not just the multiple, but the durability of net retention and the pace of platform adoption across adjacent products. That matters because cybersecurity is one of the few software areas where spend is still partly mission-critical, so incremental proof of budget resilience can pull capital away from weaker-revenue-growth software names.

Second-order winners are the broader cyber ecosystem: firms with complementary exposure to identity, endpoint, or security operations can benefit if the market interprets the print as validation that security budgets are not being frozen. The losers are less obvious: slower-growing legacy network security vendors and point-solution software names that depend on a weaker macro tape to sustain multiples. If ZS confirms durable growth while peers continue to show deceleration, procurement teams and channel partners may further consolidate around a smaller set of perceived platform winners, amplifying share shifts over the next 2-4 quarters.

The main risk is not the quarter, but the guide. A strong ARR number paired with cautious FY commentary would likely be sold as a near-term beat with limited durability, especially after a run into earnings. Conversely, if ARR comes in merely in line, the stock could de-rate quickly because expectations have shifted from “growth is intact” to “growth is re-accelerating.” The timing is important: over the next 1-3 trading sessions, reaction should be dominated by ARR and billings optics; over 3-6 months, margin and free-cash-flow credibility will determine whether any post-print rally sticks.

The contrarian angle is that the market may already be paying for a best-case ARR surprise, leaving asymmetry skewed toward disappointment if management emphasizes efficiency over acceleration. In that case, the better trade may be relative value rather than outright beta: own the name only if you believe it can outperform both on growth and on durable operating leverage. If the print is strong but guidance is merely solid, the upside could be capped by investors rotating into second-tier cyber names with cheaper growth-adjusted valuations.

Key Decisions for Investors

• Go long ZS into the print only via defined-risk call spreads for the next 2-6 weeks; structure for upside from an ARR beat while limiting downside if guidance disappoints.
• If already long ZS, trim 25-35% into the event and re-add only if post-earnings guidance confirms sustained ARR acceleration; avoid chasing a pre-earnings multiple expansion move.
• Pair trade: long ZS / short a slower-growth cybersecurity peer basket over 1-3 months; thesis is share gain and valuation divergence if ZS prints a cleaner growth trajectory than the group.
• For event traders, consider a post-earnings straddle only if implied volatility remains elevated but not excessive; the binary risk is concentrated in guide quality rather than the reported ARR number.
• Set a downside trigger: if ARR is in line but commentary sounds conservative, fade any initial pop and look for a 1-2 week mean reversion trade rather than holding for momentum.