Zscaler Stock (ZS) CRASHES 30%: Squeezed by Palo Alto and Netskope?

追加: 2026-05-28

[00:00:00]Zcalar stock down around 30% today following a disappointing earnings update. Zooming out over the past 5 years. Similarly, the stock has lost about 35% of its value. So, the company has underperformed despite the fact that the underlying fundamentals appear to be heading in the right direction. You look at the annual recurring revenue growing at a 22% annualized rate over the last couple of years, now around $3.5 billion. management talks about attractive margins, attractive free cash flow, growing customer commitments. I mean, if you have a business where the revenue or the customer commitments are growing at a 20 to 30% rate, you would think that the stock price should be going up. Management also exceeded their own guidance, delivering better revenue, operating profitability. These are adjusted figures and underlying earnings than what they had previously said they they could do during the third quarter.

[00:00:52]And so in this video, we're going to explore why has Zcaler stock sold off so significantly in fairly short order and what about this quarter in particular has caused this 30% haircut. We're also going to provide an overview of what does Zcaler do for this video. If this is your first time tuning in, my name is Daniel. This is the first time I've really dug into Zcaler. So I'd love to hear your thoughts, you know, in the comments below if you feel like I'm missing something or there's another perspective that I should consider. And if you enjoy educational investing content, I do appreciate you hitting that thumbs up, hit that subscribe button as we're looking for potential multibaggers, the types of stocks that could go up hundreds or even thousands of percent over time. That's the goal.

[00:01:32]And so when we're looking at Zscaler, the really the key understanding is that it's it's about replacing the old firewall or the VPN model with a cloud security checkpoint that verifies every request and connects users only to the apps they're allowed to use. I mean previously you'd have some sort of corporate network and you know the employees working within and then once you breached that network then you can get access to everything. But in a environment that's more distributed where you have folks looking to work from home the office maybe a coffee shop maybe a different branch location it's important to be able to have a zero trust exchange a zerorust cloud. So that way you're only really getting access to the data that you're supposed to and you're not necessarily just breaching, you know, a a malicious actor doesn't just breach one wall and then get access to everything. So it's about managing really who who has the right data and the right access points. So that way you don't have one breach that then can impact everything. At least that's my understanding. And when you think about the business model, they're effectively selling cloud security subscriptions to large companies, then grow as the customers add more users, add more apps, add more products. And they've talked about, they've done case studies working with companies like T-Mobile, Seammens, United Airlines. And it's fairly easy to see the need for why this company should be able to keep growing over time because they're saying look as work apps data AI move outside the old corporate network model Zcaler's opportunity expands. They already have around 9,400 customers around 40% of the Forbes Global 2000 around 45% plus of the Fortune 500. So really this opportunity is about new customers and penetration and deeper wallet share in their existing customer base which is going to be using more AI you know trying to figure out how do we make sure we silo the data in way that's protected and having a global or remote you know workforce. So it there's all these complications to consider and AI I'd argue makes it even trickier to assess and management calls out AI as actually being a tailwind for the business. They say we expect AI and mythos like frontier models. Mythos for those that you know aren't familiar that's the model that Anthropic the leading a uh AI lab called out that mythos is this supposedly just groundbreaking AI model that is finding all sorts of vulnerabilities uh across you know operating systems browsers and it's day one you know security vulnerabilities oftentimes things that haven't been known about for decades you know the in in you might have a software solution that's been available for decades where there's been these vulnerabilities that arguably are now getting detected because of this AI intelligence, this mythos model and and models like it. and they view this as a tailwind for their business. And the marketplace or the market solution, the secure access service edge solution enables them to hide applications and make them invisible to attackers while also eliminating sort of the lateral threat movement. So, it's interesting that management's effectively saying this is an opportunity for them to accelerate and they're talking about around a hundred billion serviceable market opportunity within this zero trust environment. So, I find this to be very interesting because you have a business with a couple billion dollars in revenue growing at a high rate management talk talking about a hundred billion dollar opportunity. So that should suggest years of obvious growth potential at least you know that's the potential part and it's backed by the the actual growth it's backed by you know I I spoke to a cyber security expert at one of the Fortune 500 companies uh just yesterday and he was talking about how look the security the cyber security incident is this is not heading in the right direction where we are seeing it go from a monthly occurrence to now effectively daily occurrence where it's it's about these bad actors possibly using these AI solutions to penetrate and to cause the cause this problem potentially and so we are seeing this elevated you know this uptick in incidents and so having a cyber security solution has never been more important so I can understand the growth potential for a company like Zcaler and then it goes okay so I see the growth. I see what management's talking about in terms of the opportunity. So, why is the stock down around 30% today to around $126 per share? That's ZS stock. So, there's a couple of reasons.

[00:06:25]First of all, management provided an early look on their fiscal 27, saying they're expecting their annualized recurring revenue to be around 16 to 17% growth for fiscal 27.

[00:06:39]That's a huge deceleration in terms of annualized recurring revenue from around the 25% that they recently posted. So then there's the question of why are they decelerating so hard and during the quarter on the transcript management called out yeah we have revenue retention net revenue retention of around 115%. So that means their existing customer base is going to spend you know roughly 15% more without onboarding any new customers. So very sticky business and the existing cohort spending more. So net even if they don't onboard any new customers, it's still growing around 15% per year. That's a great business.

[00:07:21]But the challenge, and this is what they talk about, is that the the area that we haven't been performing as well as we'd like is new logo. It certainly is a large priority for us, but I did take a tempered view of new logos going into 2027. So if they're saying 16 to 17% growth and net revenue retention is around 115%. That means new logo new customers is only around 1 2 3%. And so that is you know sort of this headwind that it is important for Zcaler investors to consider. So they're in short they're having difficulty winning new logos, new customers. And this is a little bit surprising because you you look at their results, you look at their guidance and they're saying, yeah, in yes, they're expecting this huge deceleration in fiscal 27. In the upcoming quarter, it is a little bit of a deceleration from 25% to around 22%.

[00:08:17]But the key concern here is that you have the folks inside the company abandoning ship. And in this case, in the third quarter, two sales leaders departed the company. They're saying look we already replaced one of them but we are in various different stages of hiring another. So this is an important dynamic when you have the internal vote effectively saying either there's no confidence or there's competitive risks here and this is a part of the reason why uh the stock is down today. It's it's multiple factors. One is the you know the logo growth isn't what they expected. two is the sales machinery clearly is being overhauled with two of the insiders leaving that management calls out. That's a super super important data point. And then management also concedes that look when you look at across the market and this is from um Jay Chadri the founder co-founder and CEO of Zcaler. He said look we've had a limited coverage in the lower end of the market. It's generally for for these enterprises, it's generally 2,000 to 10,000 users, these types of companies.

[00:09:25]However, at the high end, our coverage is pretty strong. This dynamic effectively says, look, we have a strong salesforce that focuses on the very largest companies, but when you're talking about enterprise companies and you're looking at the smaller of the enterprise companies, that's where our competitive strengths aren't really showing. And you can see that in the numbers as well. When you're looking at competitors like Netscope posting which admittedly are much smaller, they're posting even better growth and they're targeting that lower end of the market.

[00:09:56]So that does suggest this challenge and there is a concern about a somewhat of a pinser aspect because if you look at PaloAlto Networks PW another cyber security company they're possibly taking share from the top end because their comparable solution in the the secure access service edge market. They said it's doing around $1.5 billion and growing around 40%. So clearly faster than what Zcaler was posting. That's from last quarter for PaloAlto Network.

[00:10:27]They'll have their updated earnings in the coming week. And one could argue maybe they're taking incremental share by offering a broader platform than what uh Zscaler offers. So there there is this concern that maybe broad platform consolidation can be favoring PaloAlto network because it's not just offering let's say the firewall that is what made you know PaloAlto famous but now they're offering a full suite of solutions and that might just resonate better. One throat to choke might be better for the end customers and that's why you know they're they're arguably taking share possibly from the higher end. Uh so possibly taking some of these deals that Zcaler would have won these lo these large logos that Zcaler would have won.

[00:11:13]So is Zcaler on sale when I consider all these dynamics? Well, first of all recognize none of this is financial advice. I'm just sharing my thoughts as I look at this company. Also, quick plug about Unrivaled Investing. Neil F wrote, "I rarely take the time to give feedback. Ask my wife. She knows all too well. However, I wanted to make a point of saying that I'm very impressed with Unrivaled Investing." This follows Colin who wrote unrivaled save my portfolio my pension that is. So if you're looking for compelling ideas I call out you know real-time portfolio updates. I have an exclusive community for premium members where I'm sharing you know enhanced details in terms of different portfolio companies as well as just sharing interesting and compelling ideas. Come check out unrivaledinvesting.com.

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[00:12:48]So, thinking about Zscaler, you know, I regular viewers know that I have a fairly straightforward checklist where I'm thinking about obvious growth. I'm thinking about management alignment. I'm thinking about compelling valuation. And those three really carried the bulk of the weight. The obvious growth part, you could say I think we're halfway there in terms of answering that just because of the historic growth and the market opportunity. I'd want to dig into further to understand okay how are you going to out compete the other players you know before saying oh for sure obvious growth but let's go through some of the other elements like the aligned management you see Jay Chadri the founder or one of the co-founders his family he still has a roughly 16 17% stake in the company that's roughly worth3 billion $3.4 $4 billion. So you could argue that he is quite aligned as the CEO to deliver value. You could look at his compensation over the past few years really taking a token salary of around $24,000. In the past 2 years, whereas in 2023, he did get a sizable stock award. So this is really he's making a bet on the stock. And given that the stock has underperformed the past 5 years, he's, you know, working for free for you for the shareholders that have been, you know, effectively, you know, with with the company. Now maybe maybe saying working for free is a little bit of an exaggeration given that he got such a rich stock option package uh you know the performance stock options or units uh a couple years ago but I I do think broadly he's heavily incentivized to get the share price higher over time especially from this low point where it's down 30% plus over the last 5 years. So I think the alignment I'd say yeah mostly.

[00:14:29]Now thinking about the compelling valuation I think it is also worth understanding their financials. I personally do not like it when a company reports sizable losses which they do and sizable dilution which they do and then at the same you know the other side of their mouth they're saying well you have to adjust for our huge stockbased compensation. And then if you adjust for that, you know, you're you have tremendous profitability. We have 20% plus operating margins. When you adjust for this huge expense that is stockbased compensation, that stockbased compensation actually becomes an even greater problem. Uh when you have a stock price that goes down, let's say 30% over 5 years, because all that those existing, you know, employees that have been getting that package, they're going to say, "Wait a second. You said the stock was worth, let's say, $100,000 a year in compensation. I It hasn't been that $100,000 a year. It's really been $70,000 a year.

[00:15:30]When I'm when I come up for, you know, let's say renewal, reviewing my annual package, I'm expecting to get some sort of, let's say, growth on top of that.

[00:15:40]So, that option package should now be $120,000.

[00:15:44]So now the delution really starts going crazy because you you're want to make up for where you previously are and now you say, "Hey, I want $120,000 versus the $100,000, you know, the in stock value I was previously getting." [snorts] And the fact is the share price is much lower. So now you have to issue even more shares. So you're going to see some, you know, this is what these various different companies do is then they lay off a bunch of employees. That way it makes the dilution, you know, easier to stomach. Personally, I look at this and I just don't care for it. It's sort of like, you know, a young kid bragging that they, you know, are wearing pull-ups when you when you say, "Hey, I I have this profit figures and reality is you're hugely unprofitable."

[00:16:27]And that's, you know, look, they're in they should be in the big boy club because they're generating billions of dollars in revenue. Let's I I would expect management to eventually say, "Look, we let's let's treat us like a real company and let's deliver real profit margins over time. As I think about the valuation framework, and keep in mind they're currently unprofitable, but where could they be in the years ahead? I'm penciling out around a 20% margin. They have around 80% gross margins, just shy of that. And I'm thinking about their growth rate in the years ahead, saying, yeah, they're they're guiding to 16 to 17% growth in 27. So maybe it's around 15% over the next 5 years ballpark. And then throwing, you know, some sort of earnings multiple over, you know, assuming 5 years out. It's not super compelling when I'm when I'm looking at this framework. However, it's possible that this actually doesn't matter that much. It's possible that, you know, you may be looking at Jay Chowry and he might say, you know what, for $20 billion, maybe it's time to shop around the company. And if you look at his track record, he calls out very clearly on his, you know, biography, J Chadre's biography, that he founded four prior companies. And those four prior companies also had four significant exits previously. So is it possible that Zcaler ultimately gets put on the the the chopping block or gets sold uh in the coming months or quarters or years?

[00:17:49]Now recognizing this is much bigger scale than any of his other prior holdings. But I think about Zcaler and possibly Cisco being a tough competitive platform versus something like PaloAlto.

[00:18:01]So I I think there is a real chance that Zcaler gets on the market. If you do see PaloAlto Network continuing to win share by having having a full platform offering, it's possible you have someone like Cisco say, "Hey, this this could fit really well with our existing security unit. I think they they acquired Splunk." And so there's there's a lot of potential here. in which case the current price it wouldn't surprise me if you were to get some sort of 20 30% premium from the current price uh just from some sort of takeout. So overall I don't view the absolute valuation as deeply compelling. I think there are better plays out there. But I wonder J Chry, he's not not really a youngster. At some point will he just consider saying you know what I've I've had a good run for it. My goal has been to grow this as fast as I can. Hence the reason why they're not posting the profit margins that I would expect because once again they're they're using these sort of mechanisms like stockbased compensation to hey let's let's goose up our our revenue growth. Uh and so o overall I I look at this and meh maybe maybe they get acquired maybe the stock you know gets a nice bounce in the in the coming quarters. It's it's probably too hard for me at this point to to say with definition, oh, this is a deeply compelling sort of setup. But for the investors that are already in it, this is the type of, you know, what what I would want to think about, you know, for the investors that are already in Zcaler is I would want to reflect on what do you think is the likely outcome in the years ahead. Do you think that it decelerates significantly further or do you think they're able to maintain sort of a 15% type of growth in the years ahead? Because if they do, then arguably this is a, you know, very fair or reasonable point, you know, entry point.

[00:19:51]If you know, you're saying, okay, this is going to keep compounding at 15% on a per diluted share basis. Long-term, they're going to be able to get to 20% margins. And by the way, given that there's a lot of stockbased compensation, they are trading at around a 4% free cash flow yield. So that 4% cash is going to acrue to shareholders.

[00:20:10]So there is this potential of maybe a high singledigit or maybe a teens percentage return. But once again, it would require an assumption that you're saying I have confidence that this is going to be a mid to high teens grow over time. And I don't think I quite have enough confidence to say that as someone that's relatively new to this, new to the stock and new to the situation, but I welcome, you know, outside perspectives. You know, if if you have a strong opinion on whether or not Zcaler would be an attractive acquisition or if you have a strong opinion on their growth rates in the years ahead or thoughts on the either competitors potentially taking share or if you if you've uh been encountered any of their products in the companies that you work with, I'd love to read the comments below. And thanks so much for watching Unrivaled Investing.