Navigating Zscaler Stock After Strong Q2 Earnings Results

Zscaler, Inc. (ZS) has seen significant growth following its second-quarter earnings release for fiscal year 2025, with shares rising by 7.7% since March 5. The company delivered earnings of 78 cents per share, surpassing the Zacks Consensus Estimate by 13%. Additionally, its revenue grew by 23.4% year over year, reaching $647.9 million.

With this rebound, investors now find themselves at a crossroads—should they continue to hold Zscaler stock or cash in on profits? Given Zscaler's strong position in Zero Trust security, its improving financials, and its attractive valuation, maintaining ownership of Zscaler stock seems like a wise choice.

Annual Recurring Revenue (ARR) and Billings Growth Strengthen Zscaler's Market Position

Key to Zscaler's revenue momentum is its annual recurring revenue (ARR), which increased by 23% year over year to exceed $2.7 billion in the latest quarter. This consistent growth signals Zscaler’s capacity to retain and expand its enterprise customer base, particularly as organizations shift toward Zero Trust security solutions.

In terms of overall performance, Zscaler reported billings totaling $743 million, an 18% increase from the previous year. Notably, unscheduled billings, which include new upsell and renewal contracts, rose more than 25%. Such figures demonstrate Zscaler's strong ability to secure long-term agreements, further solidifying its growth prospects. Management is optimistic about reaching $3 billion in ARR by the end of fiscal 2025, confirming its leadership in the cybersecurity arena.

Zscaler's Dominance in Zero Trust Security Boosts Market Adoption

Zscaler has established itself as a leading player in the rapidly expanding Zero Trust security market, which, according to Fortune Business Insights, is expected to grow at a 16.7% compound annual growth rate (CAGR) through 2032. As organizations move away from outdated firewall-centric security models, Zscaler’s Zero Trust Exchange platform provides a scalable and cloud-based alternative that does away with traditional network security infrastructures.

During the second quarter, Zscaler's “Zero Trust Everywhere” initiative saw a surge in adoption, with over 130 enterprises engaging in the framework. One notable case involved a Fortune 50 energy corporation that incorporated 25,000 users in a multi-million-dollar agreement. Furthermore, the company's Zero Trust Branch initiative experienced growth, with 57% of new customers being first-time adopters of Zscaler's services in the second quarter. These patterns underscore Zscaler's successful expansion of its customer base while ensuring strong retention rates.

Innovation continues to be a driving force for Zscaler. The introduction of AI-driven threat detection, Zero Trust SD-WAN, and 5G security solutions bolsters its competitive position. As the threat landscape escalates, Zscaler is in prime position to take advantage of the increasing demand for sophisticated security solutions.

Reasonable Stock Valuation of Zscaler Despite Market Recovery

Even with the stock's impressive rise of 15.7% year to date, Zscaler remains reasonably priced compared to its industry peers. While the Zacks Security sector shows an average price-to-sales (P/S) ratio of 12.95, Zscaler trades at a lower multiple of 10.82.

Concerns About Slowing Growth Rates

Although Zscaler reports solid revenue growth, the deceleration in that growth is a point of concern. The company's revenue increase of 23% year over year in the second quarter is less than the 30% growth rates observed in previous fiscal years.

Zscaler's guidance for fiscal 2025 anticipates a revenue growth rate of 22%, down from 34% in fiscal 2024. Moreover, the Zacks Consensus Estimate indicates that revenue growth may slow further to 19.7% in fiscal 2026.

This slowdown warrants careful monitoring by investors. Cybersecurity expenditures are still strong; however, competition in the Zero Trust market is intensifying, and customers are taking longer to finalize large transactions.

Conclusion: Maintain Zscaler Stock for the Time Being

Zscaler’s robust financial results, position as a leader in Zero Trust security, and improved profitability make it an appealing stock to hold. While the slowing revenue growth is a concern, the company's increasing market share, AI-driven innovations, and rising ARR create a strong foundation for long-term success.

At present, Zscaler holds a Zacks Rank of #3 (Hold).

Zscaler, Earnings, Investment