Investment Thesis: Zscaler, Inc. (ZS)

By Vijar Kohli | 2026-01-02

1. The Application Software Battleground

(Context: Why This Matters to the Sector)

The Application Software landscape is evolving. Zscaler, Inc. competes against peers with a median revenue growth of 15.0%.

The cloud security market is experiencing rapid growth driven by the increasing adoption of cloud computing and the escalating threat of cyberattacks. Organizations are increasingly relying on cloud-based security solutions to protect their data and applications. This trend is expected to continue in the coming years.

2. The Investment Thesis: The Turnaround Play: Can ZS Fix its Margins?

(The Core Argument)

Core Thesis: Zscaler is a leader in the rapidly growing cloud security market. The company's innovative product offerings and expanding customer base should drive continued revenue growth and profitability. Successful execution of its growth strategy, coupled with favorable market conditions, could lead to substantial shareholder returns.

Key Drivers:

• Zscaler's leading position in the cloud security market allows it to capture a significant share of the growing demand.
• Continued innovation and product development will drive further adoption and revenue growth.
• Expansion of FCF margins will lead to increased profitability and shareholder value.

3. The 🐂 and 🐻 Scenarios

(Context: Risk/Reward Triangulation)

The Bull Case: Best In Class Execution

• Zscaler's leading position in the cloud security market allows it to capture a significant share of the growing demand.
• Continued innovation and product development will drive further adoption and revenue growth.
• Expansion of FCF margins will lead to increased profitability and shareholder value.

The Bear Case: Valuation Compression

Thesis: Zscaler faces significant competition in the cloud security market. A failure to innovate or adapt to evolving threats could result in market share loss and reduced profitability. Additionally, an economic downturn could negatively impact IT spending and Zscaler's revenue growth. These factors could lead to a significant decline in the stock price.

Risks:

• Competition from established players and emerging startups in the cloud security market.
• Economic downturn impacting IT spending and cybersecurity budgets.
• Security breaches or service disruptions affecting Zscaler's reputation and customer trust.

Downside Scenario: Valuation compression to [X]x implies [X]% loss.

4. Valuation Analysis

(Context: Fair Value Analysis)

Snapshot as of 2026-01-02

Blended Fair Value: $18.2B (Implied Market Cap)

Valuation Rationale

The current price does not have a positive upside, and based on current financials with projections, I cannot suggest a target price. There are not enough data to reliably create projections.

Financial Deep Dive

Revenue Quality

• 3-Year CAGR: 23.3% (TTM)
• Trend:
  • 2025: $2673.1M
  • 2024: $2167.8M
  • 2023: $1617.0M

Unit Economics & Margins

• Gross Margin: 76.9%
• Operating Margin: -4.8%
• FCF Margin: 27.2%

Capital Allocation

• R&D Intensity: Est 15.0% of Revenue.
• Shareholder Returns: [Check FCF Usage]

Contribution to the Primer

This investment thesis contributes to the Technology section of the Technology Investment Primer by:

1. Benchmarking: Establishing a 50.5 Rule of 40 baseline for ZS.
2. Variant Perception: Challenging the consensus view on [Growth/Margin].
3. Connection: Linking to Application Software peers.

Related Primers: [Link to relevant sector primers]

Database Updates Required:

• Add ZS to companies Supabase table
• Update Application Software_metrics with latest data

Conclusion & Action

Rating: BUY

Conviction: Medium

Position Sizing: [X]% of portfolio (risk-adjusted)

Key Milestones to Monitor:

1. Next Earnings Call: Sustain 23% growth.
2. Margin expansion beyond -5%.

Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results.