Zscaler, Inc. (ZS)’s Growth Engine Is Strong, But Slowing ARR Could Pressure the Stock

Zscaler, Inc. (NASDAQ:ZS) continues to experience strong growth as it expands its platform adoption. The company reported impressive fourth-quarter and fiscal 2026 results on September 3, with solid revenue and earnings beating expectations. FBN Securities upgraded the stock to Outperform and raised the price target to $190 from $175, citing the strong performance.

The company's growth is expanding beyond its traditional seat-based business, with increased focus on data security, Security for AI, and Zero Trust Everywhere. While revenue grew 25% year-over-year to $898.2 million, the 25% increase in ARR to $3.77 billion caught Wall Street's attention. Excluding Red Canary, organic ARR grew 20% to $3.63 billion, with organic net-new ARR increasing 17% year-over-year.

The company's profitability is also improving, with non-GAAP operating margin reaching a record high of 24% in the fourth quarter and 23% for the full year. Despite the positive outlook, Zscaler's fiscal 2027 ARR guidance of $4.396 billion to $4.426 billion has raised concerns, suggesting potential slowing in ARR growth. This could shift the company from a high-growth cybersecurity stock to a high-teens growth company, potentially leading to a lower multiple and a re-rating of the stock.

Zscaler faces competition from industry giants like Palo Alto Networks and CrowdStrike, and customers may choose to consolidate their security solutions, potentially impacting business. Hedge fund interest in Zscaler remains modest, with only 3.85% of shares sold short as of August 14. While Zscaler's growth engine remains robust, investors should consider the potential impact of revenue growth settling in the high teens and intensifying competition from larger cybersecurity platforms.