Can Zscaler Recover From Its 34% YTD Drop?

Zscaler's (NASDAQ: ZS) stock price has dipped by roughly 34% year to date as continued net losses and a decelerating revenue growth rate weigh down on the cybersecurity stock. The company may get a boost as its cybersecurity solutions can safeguard artificial intelligence (AI) agents, which are expected to become more popular. However, there are meaningful hurdles that can prolong this correction.

Image source: Getty Images.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

Zscaler's revenue growth has been steadily decelerating

When a stock delivers substantial year-over-year revenue growth, it's easier to look over high net losses and focus on the bullish thesis. However, those same losses become more central to a stock analysis once revenue growth slows.

That has been the case for Zscaler in recent years. It has a five-year annualized revenue growth rate of 44% that drops to 34.8% for its three-year CAGR. Zscaler only reported 25% year-over-year revenue growth in its fiscal 2026 third quarter. It's a sign that growth has slowed down considerably, and the company remains unprofitable.

Zscaler mentioned in its Q3 FY26 press release that it is attracting new customers and expanding relationships with existing ones while hinting at a focus on "driving profitable growth across multiple vectors."

Profitability may be on the way soon, based on the company only posting a -1.6% net profit margin in its fiscal 2026 third quarter. However, the excitement about profitability may be muted by a steady trend of slower revenue growth.

It's really hard to value Zscaler, but guidance suggests the overall picture will worsen

Investors can't use the P/E ratio to assess Zscaler since it is unprofitable. The stock has a 6.6 price-to-sales ratio, which is much lower than those of CrowdStrike and Fortinet. It's not the best metric to use, since a company on the verge of bankruptcy can have a price-to-sales ratio below 1, but other valuation metrics like the P/E and PEG ratios aren't suitable at this stage.

While Zscaler has a healthy balance sheet that includes $4.6 billion in total current assets, its long-term outlook isn't great. Although the company touted agentic AI as a meaningful opportunity, guidance suggests that revenue deceleration will continue.

Zscaler anticipates 16% to 17% year-over-year revenue growth in fiscal 2027. It's a far cry from the 44% annualized revenue growth rate over the past five years. The company's financial growth rates are well removed from what they were when Zscaler commanded a price of almost $400 per share back in 2021.

Decelerating growth, combined with guidance suggesting more of the same, doesn't mean the AI opportunity is as groundbreaking as the company suggests. Artificial intelligence has been a major catalyst for many companies, but the numbers suggest this type of transformation isn't currently underway at Zscaler.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Fortinet, and Zscaler. The Motley Fool has a disclosure policy.