Zscaler: Stifel hikes target on AI cybersecurity prospects

Stifel increased its price target on Zscaler Inc (NASDAQ:ZS) following the company's first analyst day since 2021, highlighting the potential of the firm's artificial intelligence capabilities. The investment firm upgraded Zscaler's target from $200 to $235 and maintained its Buy rating. At the event, Zscaler's management unveiled its strategy, product offerings, marketing priorities, and long-term financial projections.

Analysts praised the company's zero-trust architecture, which was deemed crucial as AI agents and potential threats proliferate. Zscaler's base case projected ARR of over $8 billion, with a 17% compound annual growth rate, while the upside scenario reached $10 billion, or 22% growth, driven by AI tailwinds. Stifel deemed the base case achievable and aligned with fiscal 2027 guidance. The upside case would necessitate accelerated growth, which the brokerage considered possible but not yet factored into expectations.

Zscaler's profitability projections were largely in line with market expectations, with a target operating margin of 27% to 30% and free cash flow margin of 29% to 32% in fiscal 2031. Management reaffirmed its first-quarter and full-year fiscal 2027 targets, which was welcomed after the recent change in chief revenue officer. The analysts believed Zscaler's market opportunity was sizable, pegging it at $220 billion, and that AI agents needed to be secured in a zero-trust manner to prevent lateral movement and agent misbehavior.

They saw this as an emerging opportunity, given the unique data Zscaler possesses. The analysts concluded that Zscaler had several factors to sustain at least mid-to-high-teens revenue growth and margin expansion in the coming years.