Should You Buy, Sell or Hold ZS Stock After a 46% Rise in 3 Months?

Zscaler (ZS) shares have surged 46% in the last three months, outpacing its industry and key competitors, driven by expansions in AI capabilities, strategic acquisitions like Red Canary, and deeper integration within the federal government, now serving 14 of 15 U.S. cabinet-level agencies; however, investors should note that Zscaler's aggressive investments in sales & marketing and R&D are pressuring near-term profitability, with fiscal year 2025 earnings per share expected to decline 4% year-over-year, and the stock currently carries a premium valuation.

Analysis

Zscaler (ZS) stock has demonstrated significant strength, climbing 46% in the past three months and substantially outperforming the Zacks Security industry's 10.7% return and peers such as Palo Alto Networks (4.8%), CyberArk Software (8.3%), and CrowdStrike (23.2%). This surge is attributed to strategic advancements including the launch of an Asset Exposure Management solution, an inorganic expansion through the acquisition of Red Canary for Managed Detection and Response, and partnerships with SAP to integrate Zscaler Private Access within SAP's RISE framework and with NVIDIA and CrowdStrike to embed AI technologies into its Zero Trust Security model. Financially, Zscaler reported a robust 114% 12-month trailing dollar-based retention rate in Q3 fiscal 2025, a 30% year-over-year increase in Remaining Performance Obligations, and growth to 642 customers with over $1 million in ARR and 3,363 customers with over $100,000 in ARR. The company is also deepening its federal government footprint, now serving 14 out of 15 U.S. cabinet-level agencies and benefiting from inclusion in Amazon Web Services’ Internet Control Message Protocol for easier federal access. However, these growth initiatives are accompanied by concerns: intense competition, rising S&M and R&D expenses are expected to pressure near-term profitability, with fiscal 2025 non-GAAP EPS guided to $3.18-$3.19 and the Zacks Consensus Estimate at $3.06, implying a 4% year-over-year decline. Furthermore, Zscaler trades at a premium valuation, evidenced by a Forward 12-month P/S ratio of 13.92X, far exceeding the sector average of 5.54X, and a Zacks Value Score of F, contributing to its current Zacks Rank #3 (Hold).

Key Decisions for Investors

• Given Zscaler's significant stock appreciation, strategic advancements in AI and government sectors, and strong customer metrics, investors currently holding the stock may consider maintaining their positions, aligning with the article's 'Hold' conclusion despite near-term profitability headwinds.
• Prospective investors should exercise caution due to the stock's premium valuation, reflected in a Forward P/S ratio of 13.92X, and the anticipated 4% year-over-year decline in fiscal 2025 earnings per share, warranting a thorough risk-reward assessment.
• It is advisable to closely monitor Zscaler's ability to convert its substantial investments in S&M and R&D into sustained revenue growth that effectively outpaces expense increases, alongside tracking key performance indicators such as customer acquisition, dollar-based net retention, and Remaining Performance Obligations.