Wolfe Research lifts Zscaler stock target to $310, keeps Outperform rating

Wolfe Research raised its price target on Zscaler (ZS) to $310 from $250, maintaining an Outperform rating, after the company's Q3 FY25 earnings release spurred a 5% after-hours stock increase. The revision reflects Zscaler's strong year-to-date performance, outperforming key industry benchmarks, and an anticipated revenue growth of 27.77% with impressive gross profit margins of 77.86%. Zscaler's potential to disrupt the legacy network security market and benefit from AI adoption underpins the analyst's long-term positive outlook.

Analysis

Wolfe Research significantly increased its price target on Zscaler (NASDAQ:ZS) to $310.00 from $250.00, maintaining an Outperform rating, following the company's strong third-quarter fiscal year 2025 earnings. This positive revision was underscored by a ~5% rise in Zscaler's stock in after-hours trading and its remarkable year-to-date surge of 40%, substantially outperforming the IGV (+2%) and Wolfe Research’s All Security Index (+9%). Zscaler also reported a 60.3% return over the past year, trading near its 52-week high. The company's robust financial health is evident from its Q3 FY25 results, which included a 23% revenue increase, an 18% free cash flow margin, and Annual Recurring Revenue (ARR) exceeding $2 billion; InvestingPro data further highlights current revenue growth of 27.77% and impressive gross profit margins of 77.86%. Wolfe Research raised its FY25 revenue estimate for Zscaler by 0.5% and also increased FY26 and FY27 estimates by 0.5%, projecting strong year-over-year growth rates of 22.7%, 20.2%, and 19.0% for those respective future fiscal years. Despite InvestingPro indicating Zscaler trades above its Fair Value, Wolfe's new price target implies CY26E base case revenue and FCF multiples of 13.8x and 45.5x, a premium to Zscaler's historical averages (FY+2 Sales multiples of 9.5x-10.1x) and current SaaS peer valuations (48% and 41% premiums on CY26E revenue and FCF). This optimism is shared by other analysts (Stifel, BTIG, Evercore ISI, Morgan Stanley all raising price targets) and is attributed to Zscaler's potential to disrupt the legacy network security market, leverage AI adoption, its successful go-to-market strategy, strong billings growth, a new CFO appointment, the strategic acquisition of Red Canary to bolster MDR capabilities, and an expanding product portfolio (Data Protection, Cloud Workload) nearing $900 million in ARR.

Key Decisions for Investors

• Given Zscaler's strong Q3 FY25 performance, consistent outperformance of market benchmarks, and multiple analyst upgrades, investors might consider the stock's growth prospects compelling, though the current valuation trading above InvestingPro's Fair Value and near its 52-week high warrants careful entry point consideration.
• Investors should closely monitor Zscaler's ability to achieve its projected revenue growth rates in the low-to-mid 20% range for FY26-FY27, sustain free cash flow margin expansion, and successfully integrate the Red Canary acquisition to validate its premium market valuation.
• The long-term positive outlook, driven by Zscaler's market disruption potential in network security and AI tailwinds, should be weighed against its elevated forward multiples (e.g., Wolfe's implied 13.8x CY26E revenue) compared to historical levels and SaaS peers, suggesting a need for conviction in sustained execution.