Zscaler, Inc. ZS stock has experienced significant volatility over the past three months and yet it delivered 9.2% return. Zscaler outperformed the broader technology sector and the S&P 500’s decline of 11.9% and 5.4%, respectively. ZS shares have also outperformed the Zacks Security industry’s return of 2.8% in the past three months.

Zscaler Three-Month Performance Chart

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With Zscaler's stock experiencing considerable volatility over the past three months, investors now face a key decision: Should they hold or take profits? Given the company’s market leadership in Zero Trust security and improving financials, holding on to Zscaler remains the best strategy.

Rising Demand for Cybersecurity Solutions Aids Zscaler

Traction in Zscaler’s cybersecurity solutions remains strong, driven by the escalating threats of nation-state cyber warfare, ransomware extortion and rising malware attacks. Furthermore, as enterprises shift from legacy network security to cloud-based solutions, Zscaler’s cloud-native platform gains an edge, offering a more agile and scalable zero-trust security model.

In the second quarter of fiscal 2025, Zscaler achieved a 12-month trailing dollar-based retention rate of 115%, fueled by larger bundle sales and strong upsells. Remaining Performance Obligations. representing committed, non-cancelable future revenue, grew 28% year over year. By the quarter’s end, Zscaler had 620 customers with annualized recurring revenues (ARR) exceeding $1 million, while its customer count for ARR above $100,000 reached 3,291.

Furthermore, Zscaler is rapidly improving its GovCloud offerings to achieve approval from governing bodies. ZS’ compliance with government security standards will aid it in expanding its presence among government agencies. Zscaler has enabled numerous government agencies to leverage AI-powered Cloud Browser Isolation and IPv6 for secure connectivity, popularising its GovCloud solution among its federal clients.

Zscaler’s government-focused offerings enabled it to add one cabinet-level agency client in the fourth quarter, bringing its total to 13 out of 15 U.S. cabinet-level agencies. As more government agencies use Zscaler’s products, the company’s presence in the public sector could expand, providing a stable growth stream.

These factors will contribute to both top and bottom lines. The Zacks Consensus Estimate for fiscal 2025 revenues suggests a 22.2% year-over-year increase. The consensus mark for Zscaler’s fiscal 2025 EPS has been revised upward by a penny to $3.07 in the past seven days, reflecting analysts’ optimism about its earnings capacity.

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ZS’ earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 24.6%.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

ZS Deepens Cybersecurity Portfolio With AI Implementation

Generative AI (GenAI) presents a new growth opportunity for Zscaler, as its security solutions are being increasingly adopted by global organizations to secure (artificial intelligence) AI deployments. ZS has also partnered with NVIDIA NVDA and CrowdStrike CRWD to leverage their AI expertise and collaborated with Cognizant CTSH to expand its footprint.

To strengthen its Zero Trust Security model, Zscaler partnered with NVIDIA and integrated NVIDIA’s AI technologies, including NIM inference microservices, NeMo Guardrails and Morpheus framework. Zscaler partnered with CrowdStrike to leverage CrowdStrike’s AI expertise in SIEM, threat intelligence, cyber risk quantification and real-time insights.

Zscaler collaborated with Cognizant to implement its AI-enabled zero-trust cloud security solutions in enterprise customers. This partnership was formed to accelerate the adoption of Zscaler’s AI security solutions among enterprise customers through Cognizant’s rich network base. Additionally, Zscaler has deepened its AI capabilities by acquiring Avalor and Airgap. Zscaler rise in the AI space is reflected in the performance of its second quarter fiscal 2025 results where its financials were driven by new upsell opportunities in its AI-driven analytics products.

Overvaluation: A Concern for ZS Stock

Zscaler holds a premium valuation, reflected in its Zacks Value Score of F. This is further reinforced by its Forward 12-month P/S ratio of 10.25X, significantly exceeding the Zacks Computer and Technology sector’s average of 5.49X.

ZS Forward 12-Month P/S Ratio

Image Source: Zacks Investment Research

Conclusion: Hold Zscaler Stock for Now

Despite its premium valuation, Zscaler's AI-based innovations and its strong position in the Zero Trust security space make it a stock worth retaining. Zscaler carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

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