UBS reiterates Zscaler stock rating ahead of earnings on valuation By Investing.com

UBS reiterated a Buy on Zscaler with a $260 price target ahead of next week’s earnings, citing improving April business activity, stronger Enterprise AI survey results, and rising confidence in the second-half FY outlook. The stock is down 22% year-to-date but has rebounded 20% over the past week, while 40 analysts have recently revised earnings estimates upward. Additional bullish support came from Cantor’s $300 target, Guggenheim’s expectation of a revenue beat and potential guidance raise, and B.Riley’s upgrade to Buy.

Analysis

The setup looks more like a sentiment repair trade than a fundamental re-rating. For cybersecurity, Zscaler is the cleanest way to express a rebound in software multiples because its ARR-quality profile makes it easier for buyers to underwrite, but that also means any miss on billings or forward commentary will get punished faster than peers. The recent outperformance likely reflects positioning getting less crowded rather than a wholesale change in fundamentals, so the first leg higher may be mostly short-covering and benchmark-chasing into earnings.

The second-order read-through is on AI security spend, not generic security budgets. If management confirms AI-related demand is becoming incremental rather than a repackaged zero-trust budget line, it should support a broader basket of AI-enablement vendors and could lift expectations for adjacent names tied to identity, data governance, and cloud security. If instead AI commentary is descriptive but not monetized, the market will likely compress the multiple again because the current bid already assumes AI is a measurable driver rather than an optionality story.

The main risk is timing: the next few days are about earnings and guide, while the next few months depend on whether remaining performance obligations translate into durable consumption growth. A clean beat with raised guidance probably extends the move another 8-12%, but a modest in-line print could still trigger a 10-15% drawdown because the stock has already re-rated off depressed expectations. The contrarian issue is that investors may be overpaying for evidence of improving tone when the more important variable is whether growth can reaccelerate enough to justify even the post-selloff multiple.

From a portfolio perspective, this is attractive as a tactical event trade, not a core long until the company proves it can convert better sentiment into sustained revenue acceleration. The asymmetric part is that the stock has room to gap higher on a guide-up, but downside is capped only if the earnings call gives a credible path to durable second-half improvement; otherwise the prior rally becomes the exit liquidity for longs who bought the AI narrative early.

Key Decisions for Investors

• Buy ZS into earnings only via upside-defined structures: 30-45 DTE call spreads financed by selling a lower delta call to target a 1.5-2.5x payoff if the company raises guide and confirms AI demand is incremental.
• For cash equity accounts, wait for the print and buy ZS only on a post-earnings pullback if management raises FY outlook; target a 6-12 month hold with ~20% upside, but cut if the stock loses the post-call gap within 48 hours.
• Pair trade: long ZS / short a lower-quality cybersecurity peer with more leverage to discretionary spend if the call validates relative resilience; express only after guidance to avoid paying ahead of event risk.
• If ZS reports in-line but does not lift guidance, fade the strength by shorting a partial position for a 1-2 week mean reversion trade; the setup is vulnerable to multiple compression because expectations have moved faster than fundamentals.
• Use the earnings event as a read-through for AI security beneficiaries: add a basket long in identity/data-security names only if ZS quantifies AI-related pipeline conversion, otherwise avoid chasing the theme.