Wells Fargo upgrades this cloud security giant, sees upside of 28% ahead

Wells Fargo upgraded Zscaler (ZS) to overweight with a price target of $385, a 28% upside from Thursday's close, citing strong momentum in new and upsell business and expectations for 20%+ billings growth in FY26. Analyst Andrew Nowinski anticipates Zscaler reaching $5 billion in annual recurring revenue by FY27, driven by core and emerging product growth, and sees potential for further margin expansion, noting the stock is undervalued compared to peers like CrowdStrike (CRWD) and could see multiple expansion.

Analysis

Wells Fargo has upgraded Zscaler (ZS) to an overweight rating from equal weight, increasing its price target significantly to $385 from $260, implying an approximate 28% upside from Thursday's closing price. This revision comes as Zscaler's shares have already surged 67% in 2025. The upgrade is underpinned by strong momentum in Zscaler's new and upsell business during the current fiscal year. Analyst Andrew Nowinski anticipates scheduled billings will pose less of a headwind in the upcoming year, complemented by improving unscheduled billings growth, which is projected to lay the groundwork for over 20% billings growth in FY26. Zscaler is also seen on a clear trajectory to achieve $5 billion in annual recurring revenue (ARR) by fiscal year 2027, provided it sustains mid-teens growth in core products alongside robust expansion in emerging product lines. Concurrent with accelerating revenue growth, Zscaler is expected to continue expanding its free cash flow and operating margins; the company has already met or surpassed its long-term targets for gross, operating, and free cash flow margins established in Q3 2023 and reiterated in May 2025, with Nowinski suggesting further upside potential in operating and free cash flow margins. The valuation thesis posits that Zscaler shares remain undervalued compared to peers such as CrowdStrike (CRWD), with potential for multiple expansion on both EV/Sales and EV/Free Cash Flow metrics as it approaches the $5 billion ARR milestone, which could lead to Zscaler trading at parity with CRWD.

Key Decisions for Investors

• Investors should consider the positive reassessment by Wells Fargo, driven by Zscaler's robust new and upsell business momentum and its clear path towards $5 billion in ARR by FY27.
• Monitor key performance indicators such as billings growth, particularly the evolution of unscheduled billings, and the company's ability to further expand operating and free cash flow margins beyond its already achieved long-term targets.
• Evaluate Zscaler's valuation relative to high-growth SaaS peers like CrowdStrike, as a successful execution towards its $5 billion ARR target could unlock further multiple expansion and share price appreciation.