Zscaler ZS is scheduled to report its second-quarter fiscal 2025 results on March 5, 2025.

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Zscaler anticipates revenues between $633 million and $635 million for second-quarter fiscal 2025. The Zacks Consensus Estimate for ZS’ fiscal second-quarter revenues is pegged at $634.1 million, indicating year-over-year growth of 20.78%.

For the fiscal second quarter, the company expects non-GAAP earnings per share in the band of 68-69 cents. The Zacks Consensus Estimate for ZS’ fiscal second-quarter earnings is pegged at 69 cents per share, unchanged over the past 60 days and indicates a year-over-year decline of 9.2%.

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Zscaler’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 29%.

Earnings Whispers for Zscaler

Our proven model does not conclusively predict an earnings beat for Zscaler this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is not the case here. You can see the complete list of today’s Zacks #1 Rank stocks here.

Though Zscaler currently carries a Zacks Rank #3, it has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Factors to Influence Zscaler’s Q2 Results

Zscaler’s second-quarter results are expected to reflect the sustained strong demand for its security and networking solutions, given the continuous growth in the global security space. The robust adoption of ZS’ in-cloud security platform, Zero Trust Exchange, due to the ongoing digital transformation across enterprises and the rising trend of hybrid work, is likely to have acted as a key catalyst.

The rising adoption of Software-Defined Wide Area Network (SD-WAN) solutions might have acted as a primary driver in the fiscal second quarter. Per the latest Future Market Insights report, the market size for SD-WAN solutions and products is expected to reach $80.91 billion by 2034 from $5.36 billion in 2024, at a CAGR of 31.6%. As only a handful of vendors offer security and SD-WAN solutions, Zscaler has been benefiting from the increasing opportunities in this space. The company’s partnerships with VMware and Silver Peak have been helping it secure SD-WAN deliveries. This is expected to have aided Zscaler’s fiscal second-quarter performance.

ZS’ existing core products, mainly the Zscaler Internet Access and Zscaler Private Access, have been driving customer retention. The addition of new features to its Zero Trust Exchange, such as Cloud Access Security Broker, Cloud Browser Isolation, Cloud Protection, Zscaler Digital Experience and Cloud Security Posture Management for software-as-a-service applications, is expected to have driven its product portfolio expansion and customer acquisition.

Our model estimate for second-quarter revenues from Channel Partners and Direct Customers is pegged at $577.1 million and $56.2 million, respectively. We expect the remaining performance obligation at the end of the quarter to be approximately $4.2 billion.

However, growing investments to improve sales and marketing (S&M) capabilities and higher research and development (R&D) costs might have weighed on the company’s fiscal second-quarter bottom line. Zscaler witnessed a year-over-year increase of 15.6% in non-GAAP S&M and 31.6% in non-GAAP R&D expenses in the last reported quarter. Total non-GAAP operating expenses climbed 19.4% year over year in the same quarter.

Zscaler Stock Price Performance & Stock Valuation

In the past year, Zscaler’s shares have lost 8.4%, underperforming the Zacks Security industry’s growth of 22.3%. The stock has also underperformed its peers in the cloud-based security solution space, such as Palo Alto Networks PANW, CrowdStrike Holdings CRWD and CyberArk Software CYBR, which have risen 27.2%, 24.1% and 37.3%, respectively, in the past year.

1-Year Price Return Performance

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Now, let’s look at the value Zscaler offers investors at the current levels. ZS stock is trading at a discount with a forward 12-month P/S of 10.24X compared with the industry’s 13.71X, reflecting an undervaluation.

Forward 12-Month P/S Valuation

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Investment Thesis for ZS

Zscaler is benefiting from the rising demand for cyber-security solutions due to the slew of data breaches. The increasing demand for privileged access security in digital transformation and cloud migration strategies is a key growth driver.

A strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, safeguards it from the negative impacts of ongoing macroeconomic headwinds. Portfolio expansion through acquisitions like Avalor, Canonic Security and ShiftRight is praiseworthy.

However, its aggressive investment in S&M and R&D might weigh on its near-term profitability. To survive in the highly competitive cyber-security market, each player must continuously invest in broadening its capabilities. Over the past few years, Zscaler has invested heavily to enhance its S&M capabilities, particularly by increasing the sales force.

Investment in R&D is a top priority for Zscaler. Over the past couple of years, it has almost doubled its R&D expenses to improve the design, architecture, operation and quality of its cloud platform. Though the company foresees these investments to garner benefits over the long run, these are negatively impacting margins and profit growth.

Conclusion: Hold ZS Stock for Now

While the long-term prospects for the company remain bright, the near-term challenges associated with its profit growth warrant caution.

Therefore, we believe that it’s prudent to avoid making new investments in the stock for now. For existing shareholders, holding on to Zscaler stock is the best course of action, as the long-term growth drivers are still firmly in place.

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This article originally published on Zacks Investment Research (zacks.com).

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