Morgan Stanley cuts Zscaler stock price target on competition concerns By Investing.com

Morgan Stanley cut Zscaler’s price target to $145 from $155 and reiterated an Equalweight rating, citing weaker forward guidance excluding Red Canary and intensifying competition in SASE from Palo Alto Networks, Netskope, and Cato Networks. The firm sees no material share turnaround until a new SecOps product, improved sales execution, and better operating structure begin to show traction. Offseting the caution, Zscaler’s fiscal Q3 2026 results beat expectations with EPS of $1.08 versus $1.01 consensus and revenue of $850.48 million versus $835.55 million.

Analysis

This is less a one-quarter guidance story than a margin of safety reset in the SASE category. The market is now paying for a slower customer-acquisition engine while competitors are using broader platform bundles to compress standalone security spend, which tends to show up first in mid-market logo adds and later in enterprise renewals. That means the earnings risk is not just revenue deceleration; it is longer sales cycles, lower win rates, and a higher cost to defend installed accounts, all of which can persist even if headline EPS still beats.

The second-order winner is the broader platform consolidators, especially the vendor that can cross-sell adjacent security modules into existing relationships. If customers want fewer point solutions, budget shifts away from pure-play network security toward bundles that include firewall, endpoint, and identity, which pressures ZS disproportionately versus a multi-product incumbent. A weaker SASE growth backdrop also helps channel partners that can resell a broader portfolio, while hurting specialists dependent on net-new logo velocity.

Near term, the stock likely stays range-bound to lower until there is proof that the new sales motion is working, because the next few quarters are too early for any structural fix to be visible in the numbers. The key catalyst is not the product roadmap itself, but evidence that the company can convert pipeline into repeatable bookings without further concessions. If the next prints show better-than-expected retention or a re-acceleration in smaller deal activity, the bear case can unwind quickly; absent that, multiple compression remains the dominant path.

Contrarian angle: the current setup may be overstating competitive fragility relative to balance-sheet and gross-margin durability. If management can stabilize gross retention and convert the newer SecOps adjacency into attach rates, the market could re-rate the story as a transitional distribution problem rather than a structural product issue. That would matter most over 6-12 months, not days, and is the main reason a short should be timed around confirmation of weak bookings rather than simply valuation.

Key Decisions for Investors

• Short ZS on any post-earnings strength, using a 1-3 month horizon; risk/reward improves if the market fades an initial beat while the booking trend remains soft.
• Pair trade: long PANW / short ZS for the next 2-4 quarters; this isolates platform share gain versus pure-play SASE pressure and should benefit if budget consolidation continues.
• Consider a bearish put spread on ZS expiring after the next two earnings cycles; structure for time decay while limiting premium outlay if management delivers a temporary relief rally.
• Do not chase the valuation gap alone; wait for evidence of improved logo adds or channel traction before covering shorts, since the re-rating catalyst likely needs at least 1-2 quarters to appear.