Executive Summary

Zscaler, Inc. stands as a pioneering force in the cybersecurity industry, spearheading the market’s fundamental shift from legacy, perimeter-based security to a cloud-native, Zero Trust architecture. Founded with the prescient vision that the internet would become the new corporate network, the company has established a formidable leadership position, evidenced by its robust financial profile of rapid, large-scale revenue growth and consistently expanding free cash flow margins. This performance is a direct result of its technological superiority, purpose-built cloud platform, and a highly effective go-to-market strategy centered on displacing incumbent solutions.

However, this market leadership and strong growth trajectory are set against a backdrop of intense and escalating competition. Well-capitalized incumbents, particularly network security giants like Palo Alto Networks and Fortinet, are aggressively pivoting to compete directly in the Secure Access Service Edge (SASE) market, creating a dynamic “platform war.” Concurrently, Zscaler’s premium valuation reflects deeply embedded investor expectations for continued high growth and flawless execution. This creates a narrow margin for error, especially in a fluctuating macroeconomic environment that can elongate enterprise sales cycles and intensify budget scrutiny.

This report provides a comprehensive, data-driven analysis of Zscaler, dissecting these core tensions. It will conduct a deep examination of the company’s differentiated business model, its competitive standing within the dynamic cybersecurity landscape, its historical and current financial performance, and its strategic growth initiatives. This analysis is balanced with a thorough assessment of the recent challenges, industry headwinds, and multifaceted risks the company faces, offering a holistic view to support an informed investment decision.

1. Company Analysis: Architect of the Zero Trust Cloud

1.1. The Shift from Castle-and-Moat to Zero Trust

The foundational principles of enterprise security have been rendered obsolete by two decades of technological transformation. The traditional “castle-and-moat” security model was architected for a world where applications and data resided within a trusted corporate data center, and users accessed them from within a defined network perimeter.¹ This perimeter, fortified by firewalls and accessed remotely via Virtual Private Networks (VPNs), was the primary line of defense.

This paradigm has been fundamentally broken by the megatrends of cloud computing and workforce mobility.² Applications now reside in public clouds (SaaS, IaaS, PaaS), and users access them from anywhere, on any device. Attempting to secure this new reality by backhauling traffic through a centralized data center is not only inefficient and detrimental to the user experience but also dangerously insecure.¹ The legacy approach creates a large, trusted internal network; once a threat actor breaches the perimeter—often by exploiting an exposed firewall or VPN—they can move laterally with relative ease, leading to catastrophic breaches like ransomware attacks.¹

Zscaler was founded in 2007 on the visionary premise that these trends would necessitate a complete architectural rethinking of security.² The company’s core insight was that security must follow the user and the application, not be tied to a physical network. This led to the pioneering of a cloud-native platform built on the principles of Zero Trust.

1.2. The Zero Trust Exchange (ZTE) Platform: A Detailed Examination

The Zscaler Zero Trust Exchange (ZTE) is the technological heart of the company’s business model. It is a globally distributed security cloud designed to securely connect users, devices, and applications based on the principle of “never trust, always verify”.¹

Architectural Framework

The ZTE platform is not a virtualized version of legacy appliances; it is a purpose-built, multi-tenant cloud service distributed across more than 150 data centers worldwide.6 This global presence allows traffic to be inspected close to the user, minimizing latency and improving performance. The architecture is composed of three distinct, logically separated planes 6:

1. Control Plane (Zscaler Central Authority): This acts as the centralized “brain” of the entire security cloud. It is responsible for monitoring the health of the global infrastructure and providing a single location for administrators to configure policies, manage software and database updates, and receive threat intelligence. This centralized control ensures consistent policy enforcement for all users, regardless of their location.⁶
2. Data Plane (Zscaler Enforcement Nodes – ZENs): These are the globally distributed, inline traffic inspection points that form the data plane. When a user attempts to access an application or website, their traffic is directed to the nearest ZEN. The ZENs utilize a proxy-based architecture to terminate every connection and inspect all traffic, including fully encrypted SSL/TLS traffic, at scale. This inspection is performed entirely in memory, with no data ever written to disk, ensuring high levels of security and privacy. This ability to perform full SSL/TLS inspection without significant performance degradation is a critical architectural advantage over traditional firewall-based systems, which often must bypass encrypted traffic inspection to maintain performance.⁴
3. Log Plane (Nanolog Servers): This plane is responsible for the secure collection, compression, and storage of transaction logs. Logs are continuously streamed from the ZENs to the Nanolog servers, providing customers with rich analytics, reporting, and visibility into all their traffic. This data can also be streamed to third-party Security Information and Event Management (SIEM) systems for further analysis.⁶

The Connection Broker Model

The fundamental innovation of the ZTE is that it acts as an intelligent switchboard, or a connection broker, rather than a network gateway.1 It connects authorized entities (users, devices) directly to the specific applications they need, but never places them on the corporate network. This “inside-out” connection model, particularly for private applications, makes those applications completely invisible to the public internet, eliminating the external attack surface and preventing the possibility of lateral threat movement.1

Each connection request is treated as a unique transaction and is subjected to a four-step security process ¹:

1. Verify Identity: The platform confirms the identity of the user, device, or workload, often through integration with third-party identity providers.
2. Determine Destination: It identifies the requested application or destination to understand the context of the connection.
3. Assess Risk: Using AI and machine learning models trained on over 500 trillion daily signals, the platform assesses the real-time risk of the request based on context like user behavior, device posture, and content.
4. Enforce Policy: Based on the identity, destination, and risk assessment, a dynamic policy is enforced in real-time to allow, block, isolate, or deceive the connection attempt.

1.3. Core Product Pillars and Revenue Streams

Zscaler operates a pure Software-as-a-Service (SaaS) business model, with revenue generated almost entirely from subscriptions to its platform.⁶ These subscriptions are typically sold on a per-user, per-year basis, often in multi-year contracts. The platform is organized into several key product pillars:

• Zscaler Internet Access (ZIA): This is the company’s flagship Secure Web Gateway (SWG) solution. It provides secure access for users, workloads, and IoT/OT devices to external applications, such as SaaS platforms and general internet destinations. ZIA consolidates multiple point products, including cloud firewall, advanced threat protection, sandboxing, Cloud Access Security Broker (CASB), and Data Loss Prevention (DLP) into a single, integrated service.¹¹
• Zscaler Private Access (ZPA): This is the company’s Zero Trust Network Access (ZTNA) solution and the modern architectural replacement for legacy VPNs. ZPA provides secure access to internal applications located in the data center or public cloud. Crucially, it connects users directly to applications without granting them access to the underlying network, thereby eliminating lateral threat movement.¹¹
• Expanded Platform Solutions: Building on the foundation of ZIA and ZPA, Zscaler has significantly expanded its platform to address adjacent security needs. These include Data Security (protecting data in motion and at rest, particularly from GenAI risks), Zero Trust for Branch and Cloud (securing branch offices and cloud workloads), Digital Experience (ZDX) (monitoring user-to-app performance), and Security Operations (risk quantification and threat management).¹⁶

1.4. Go-to-Market Strategy and Customer Profile

Zscaler’s go-to-market strategy is sharply focused on the largest and most complex organizations globally.

• Target Customer: The company primarily targets large enterprises, government agencies, and other major organizations. Its customer list includes approximately 45% of the Fortune 500 and over 35% of the Global 2000.⁶ As of the third quarter of fiscal 2025, Zscaler reported serving 642 customers with over $1 million in Annual Recurring Revenue (ARR) and 3,363 customers with over $100,000 in ARR, demonstrating deep penetration into the enterprise market.⁶
• Land and Expand Model: The core sales motion is a “land and expand” strategy.⁶ A customer typically makes an initial purchase of one core pillar, most often ZIA, to solve an immediate pain point like secure internet access for a mobile workforce. Once the value of the platform is proven, Zscaler’s sales teams work to expand the relationship by upselling more advanced features within that pillar and, more importantly, cross-selling additional pillars like ZPA, ZDX, and Data Protection. The success of this model is quantified by the company’s Dollar-Based Net Retention Rate (NRR), which stood at a healthy 114% in Q3 FY25.⁶
• Channel-Driven Sales: Zscaler relies heavily on a robust network of channel partners, including global system integrators (SIs), value-added resellers (VARs), and managed service providers, to generate the vast majority of its revenue.³ These partners provide the scale and local expertise required to sell to and support large, geographically dispersed enterprises.

The architectural design of the Zero Trust Exchange is not merely a technical implementation detail; it represents the company’s most significant and durable competitive advantage. This advantage stems directly from the decision to build a multi-tenant, proxy-based platform from the ground up, a stark contrast to the approach taken by many legacy competitors. Legacy network security vendors, whose business was built on selling physical firewall appliances, have attempted to pivot to the cloud by virtualizing their existing firewall software and deploying it as single-tenant virtual machines (VMs) in public cloud environments. While this allows them to offer a “cloud” solution, it carries inherent architectural limitations.

Each customer is provisioned with their own set of dedicated VMs. To inspect encrypted traffic—which now constitutes the vast majority of internet traffic—these VMs must perform the computationally intensive tasks of decryption, inspection, and re-encryption. As a customer’s traffic volume grows, they require more or larger VMs, leading to escalating costs and potential performance bottlenecks. This operational reality often forces customers of these solutions to make a difficult trade-off: either incur significant costs and performance degradation or selectively bypass inspection for much of their encrypted traffic, creating a massive security gap.⁴

Zscaler’s multi-tenant proxy architecture fundamentally avoids this trade-off. All customers share the same globally distributed infrastructure, creating immense economies of scale. The proxy design is inherently optimized for terminating and inspecting connections, allowing Zscaler to inspect 100% of SSL/TLS traffic at scale without the performance penalties associated with VM-based architectures. This architectural superiority translates directly into tangible business advantages: superior unit economics, reflected in consistently high gross margins of around 80%; a better and faster user experience, which drives high customer satisfaction (as evidenced by a Net Promoter Score of over 70); and a more effective security posture, which leads to strong customer retention and loyalty.⁴ For competitors to replicate this advantage, they would need to undertake a complete and costly re-architecting of their core products, a monumental task that protects Zscaler’s foundational moat.

2. Industry Dynamics & Market Position

2.1. Market Landscape: Zero Trust and SASE

Zscaler operates at the epicenter of a paradigm shift in networking and security, driven by the convergence of the Zero Trust security framework and the Secure Access Service Edge (SASE) architectural model. Zero Trust is a strategic mandate—”never trust, always verify”—that requires organizations to abandon the concept of a trusted internal network.⁸ SASE, a term coined by Gartner, provides the architectural blueprint for implementing Zero Trust in a cloud-native world. It converges networking services (primarily SD-WAN) and a core set of security functions, known as the Security Service Edge (SSE), into a single, cloud-delivered service.²⁰ The SSE component, which is Zscaler’s domain, comprises three key technologies: Secure Web Gateway (SWG), Cloud Access Security Broker (CASB), and Zero Trust Network Access (ZTNA).²¹

The markets Zscaler addresses are both substantial and experiencing rapid expansion.

• Zero Trust Security Market: Various market research firms estimate the global Zero Trust security market was valued in the range of $31.0 billion to $36.4 billion in 2023 and 2024. The market is projected to grow at a robust compound annual growth rate (CAGR) of approximately 16.3% to 16.7%, forecast to exceed $100 billion by the early 2030s.²²
• Secure Access Service Edge (SASE) Market: The SASE market, while smaller in absolute terms today, is growing at a significantly faster pace. Estimates for 2023-2024 place the market size between $1.7 billion and $3.8 billion. Projections show a CAGR ranging from 24% to as high as 36%, with the market expected to reach between $17 billion and $27 billion by 2030-2032.²⁷

This explosive growth is propelled by powerful and durable secular tailwinds. The enterprise shift to cloud applications, the normalization of hybrid and remote work, the escalating volume and sophistication of cyber threats, and the strategic imperative for IT leaders to simplify infrastructure and consolidate vendors are all forcing organizations away from legacy architectures and toward Zero Trust and SASE.²

2.2. Competitive Positioning and Moats

Zscaler has firmly established itself as a leader in this transformative market, a position consistently validated by independent industry analysts. The company has been named a Leader in the Gartner Magic Quadrant for Security Service Edge for four consecutive years (as of the May 2025 report), a critical endorsement in enterprise procurement decisions.²¹ Similarly, Forrester evaluated Zscaler as one of the 10 most significant vendors in its Q3 2025 Forrester Wave™ report on Zero Trust Platforms.³¹

The company’s leadership is protected by significant and defensible competitive moats that create high barriers to entry for new competitors:

• Global Infrastructure at Scale: The capital expenditure and operational expertise required to build, maintain, and secure a global network of over 150 data centers that process more than 500 billion transactions daily are immense. A new entrant cannot easily replicate this global footprint, which is essential for delivering low-latency performance to enterprise customers.⁶
• Data-Driven Network Effect: The ZTE platform benefits from a powerful network effect. With over 500 trillion signals processed daily, its threat intelligence and AI/ML engines are continuously learning and improving. A new threat identified for a single customer is instantly added to the platform’s intelligence, and protection is propagated to all other customers in what Zscaler calls the “cloud effect.” This creates a virtuous cycle: more customers lead to more data, which leads to better security, which in turn attracts more customers.⁶
• High Customer Switching Costs: Zscaler’s platform is not a simple application; it becomes deeply embedded in a customer’s core IT and security infrastructure. Once an enterprise routes all of its user, branch, and application traffic through the Zero Trust Exchange and builds its security policies and operational workflows around the platform, the cost, complexity, and operational risk of switching to a competitor become prohibitively high. This stickiness is a powerful moat, recognized by Morningstar, which assigns Zscaler a “Narrow” economic moat rating based primarily on these switching costs.³³

2.3. Head-to-Head: The Platform Wars

The cloud security market is not without intense competition. Zscaler faces formidable rivals, each with a different strategic approach to the market.

Zscaler vs. Palo Alto Networks (PANW)

This rivalry represents the central battle for dominance in the SASE market.

• Zscaler’s Position: Zscaler consistently message its architectural superiority, arguing that its purpose-built, multi-tenant proxy architecture is fundamentally better suited for cloud security than what it characterizes as Palo Alto’s legacy, firewall-centric approach. Zscaler claims its platform offers superior performance, especially for encrypted traffic, and better security by eliminating the attack surface, whereas PANW’s Prisma Access is effectively a collection of single-tenant virtual firewalls hosted in the public cloud.⁴
• Palo Alto’s Position: PANW leverages its massive installed base of firewall customers and its broader security portfolio to pitch a more unified, single-vendor platform. It argues that Prisma SASE can secure the entire enterprise—from the branch to the cloud to the user—with a consistent policy and management framework, contrasting this with what it claims is Zscaler’s more siloed, web-focused solution.³⁴
• Market Reality: The choice for customers often hinges on their strategic priorities. Organizations that are deeply invested in the Palo Alto Networks ecosystem may find Prisma Access to be a logical and integrated extension. Conversely, enterprises prioritizing a best-of-breed, cloud-native Zero Trust architecture from a focused specialist often gravitate toward Zscaler.³⁵

Zscaler vs. Fortinet (FTNT)

• Fortinet’s Position: Fortinet, another firewall incumbent, competes with its FortiSASE offering. Its primary strength lies in its integrated “Security Fabric” approach, which appeals to customers seeking to consolidate networking and security functions from a single vendor, often at a competitive price point. However, Fortinet faces a perception challenge against Zscaler, which is widely seen as the dedicated pioneer and specialist in cloud-delivered Zero Trust.³⁶
• Market Reality: According to user reviews on platforms like Gartner Peer Insights, Zscaler often receives higher ratings for service and support, while Fortinet is recognized for its ZTNA capabilities in securing internal resources.³⁷ The competitive dynamic frequently boils down to a choice between Zscaler’s specialized, cloud-native service and Fortinet’s broad, integrated hardware and software ecosystem.³⁹

Zscaler vs. CrowdStrike (CRWD)

• Partners, Not Competitors: Zscaler and CrowdStrike are not direct competitors but rather key strategic partners that address different, but complementary, layers of the security stack. Zscaler secures the network traffic and access pathways (“the pipes”), while CrowdStrike secures the endpoint devices (laptops, servers) themselves. A comprehensive Zero Trust strategy requires both.⁴⁰
• Integration as a Force Multiplier: The deep integration between the two platforms is a significant value proposition. Zscaler’s ZTE can ingest real-time device posture data from CrowdStrike’s Falcon agent. This allows for the creation of powerful, context-aware access policies; for example, if CrowdStrike detects that a device is compromised, Zscaler can automatically block that device’s access to critical applications, creating a closed-loop security response.⁴¹

Threat from Hyperscale Cloud Providers (AWS, Microsoft, Google)

The major cloud providers are increasingly offering their own native security tools. While this represents a long-term competitive threat, these offerings are currently perceived as being primarily effective for securing resources within their own cloud ecosystems. They generally lack the comprehensive, multi-cloud, and hybrid-environment capabilities required by large enterprises, which typically operate across multiple cloud platforms and on-premises data centers. For now, Zscaler’s vendor-agnostic, “secure anything-to-anything” approach remains a key differentiator.33

The competitive discourse in the market is heavily influenced by the distinction between SASE and SSE. This is more than just marketing jargon; it reflects a fundamental strategic divide. Palo Alto Networks and Fortinet, with their deep roots in networking hardware (firewalls and SD-WAN appliances), aggressively promote a “single-vendor SASE” vision. Their pitch to customers is one of simplicity and consolidation: buy a single, integrated platform from one vendor to handle both the networking (SD-WAN) and the security (SSE) for all users and branches. This is an attractive proposition for organizations looking to reduce vendor sprawl and simplify management.

Zscaler, lacking a native hardware-based SD-WAN offering, has strategically positioned itself as the undisputed best-of-breed leader in the SSE component of SASE. Its strategy is to provide the most powerful and scalable security cloud on the market and partner with a wide ecosystem of leading SD-WAN vendors. This approach presents customers with a different value proposition: instead of compromising on a single, potentially less-than-optimal platform, they can choose the best security solution (Zscaler) and integrate it with their preferred networking solution. This creates a crucial strategic decision point for enterprises. The success of Zscaler’s “Zero Trust Branch” initiative, which is designed to provide secure branch connectivity and directly challenge the core value proposition of firewall-based SASE offerings, will be a critical barometer for which of these competing market visions is gaining more traction.⁵

3. Financial Performance & Growth Analysis

Zscaler’s financial performance reflects its position as a high-growth market leader that is successfully scaling its business and demonstrating significant operating leverage. The analysis of its financial statements reveals strong top-line momentum, best-in-class margins, and robust cash flow generation.

3.1. Revenue and Billings Growth Trends

Zscaler has a multi-year track record of exceptional revenue growth, a testament to the strong demand for its Zero Trust platform. For the fiscal year ending July 31, 2022, revenue grew by 62%. As the company’s revenue base has expanded, the growth rate has naturally moderated, with revenue increasing by 48% in fiscal 2023 and 34% in fiscal 2024 to reach $2.17 billion.³ While this deceleration is expected for a company of its size, the sustained growth rate remains in the top tier of the software industry.

Recent performance indicates continued strong execution. For the third quarter of fiscal 2025 (ended April 30, 2025), revenue grew 23% year-over-year to $678.0 million.⁶ A key leading indicator for future revenue, calculated billings, grew 25% year-over-year to $785.0 million in the same quarter, showing an acceleration from prior periods and signaling improving sales productivity.⁶

Future revenue visibility is further supported by the company’s Remaining Performance Obligations (RPO), which represents the total amount of contracted future revenue that has not yet been recognized. As of April 30, 2025, Zscaler’s RPO stood at $5.0 billion, a 30% increase year-over-year, providing a strong foundation for future growth.⁶

3.2. Profitability and Margin Trajectory

A hallmark of Zscaler’s financial profile is its highly attractive and stable gross margin, which is a direct benefit of its scalable, multi-tenant cloud architecture. The company consistently reports non-GAAP gross margins in the 80% to 81% range, a best-in-class figure for a SaaS company.³

While Zscaler has historically operated at a loss on a GAAP basis due to significant investments in growth and high levels of stock-based compensation, it has demonstrated substantial and consistent improvement in operating leverage. The company’s GAAP operating loss as a percentage of revenue has narrowed significantly, from 15% in fiscal 2023 to just 6% in fiscal 2024.³ On a non-GAAP basis, which excludes stock-based compensation and other non-cash items, the company is highly profitable. Non-GAAP income from operations grew from 15% of revenue in fiscal 2023 to 20% in fiscal 2024, and reached 22% in the third quarter of fiscal 2025.³ Notably, the company reported its first-ever quarter of GAAP net income in the third quarter of fiscal 2024, a significant milestone on its path to sustained profitability.⁵

3.3. Unit Economics and Operating Efficiency

The underlying health and efficiency of Zscaler’s business model are reflected in its strong unit economics.

• Dollar-Based Net Retention Rate (NRR): This key SaaS metric measures revenue growth from the existing customer base over a twelve-month period, including upsells, cross-sells, and churn. Historically, Zscaler’s NRR has been exceptionally strong, exceeding 125% for seven consecutive quarters through the fourth quarter of fiscal 2022.⁴⁷ As the company has scaled and penetrated its customer base more deeply, this metric has moderated to a still-healthy 114% as of the third quarter of fiscal 2025.⁶ This indicates that the average existing customer continues to increase their spending with Zscaler by 14% year-over-year, providing a powerful engine for durable growth.
• Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC) Ratio: While Zscaler does not explicitly report LTV and CAC, these metrics can be estimated to assess the efficiency of its growth investments. Sales and Marketing (S&M) expense serves as a primary proxy for CAC. In fiscal 2024, S&M expense was $997.7 million, representing 46% of revenue. This figure, while substantial, has trended down from 49% in fiscal 2023 and 51% in fiscal 2022, indicating improving sales efficiency and scale.³ The LTV is supported by very high gross margins (around 80%) and a high gross retention rate, which management has stated is in the “high 90%” range.⁴⁸ The combination of a high LTV and improving acquisition efficiency suggests a very healthy LTV-to-CAC ratio, likely well above the 3:1 benchmark that is considered attractive for a SaaS business, underpinning management’s frequent references to the company’s “strong unit economics”.⁴⁸

3.4. Cash Flow and Balance Sheet

Despite its GAAP losses, Zscaler is a highly efficient cash-generating business. The company’s free cash flow (FCF) has grown robustly, with the FCF margin expanding from 21% in fiscal 2023 to 27% in fiscal 2024.³ This ability to combine high revenue growth with strong free cash flow generation means Zscaler consistently operates well above the “Rule of 40” (defined as the sum of revenue growth percentage and FCF margin percentage), a key benchmark for assessing the health of SaaS companies. In fact, the company has noted its performance often exceeds the “Rule of 60”.⁵³

Zscaler maintains a strong and liquid balance sheet. As of April 30, 2025, the company held $3.0 billion in cash, cash equivalents, and short-term investments.⁶ This substantial cash position provides significant financial flexibility to continue investing in growth initiatives, pursue strategic acquisitions, and navigate potential economic uncertainty. The company’s primary long-term liability consists of convertible senior notes, but its overall capital structure remains conservative.⁵⁵

Metric (Fiscal Year ends July 31)	FY 2022	FY 2023	FY 2024	Q3 FY25 (TTM)
Revenue (in millions)	$1,090.9	$1,617.4	$2,167.8	$2,546.8
YoY Growth	62.1%	48.3%	34.0%	27.8%
Calculated Billings (in millions)	$1,480.0	$1,947.5	$2,522.6	$2,961.2
YoY Growth	59.4%	31.6%	29.5%	24.3%
RPO (in millions)	$2,608.8	$3,837.7	$4,995.0	$4,995.0
YoY Growth	64.1%	47.1%	30.2%	30.2%
Non-GAAP Gross Margin	80.6%	79.9%	80.6%	80.9%
GAAP Operating Margin	(25.4%)	(14.5%)	(5.6%)	(4.6%)
Non-GAAP Operating Margin	10.9%	14.9%	20.4%	21.7%
Free Cash Flow (in millions)	$223.3	$333.6	$585.0	$734.2
Free Cash Flow Margin	20.5%	20.6%	27.0%	28.8%
Dollar-Based Net Retention Rate	>125%	125%	117%	114%
Customers >$100K ARR	2,095	2,599	3,109	3,363
YoY Growth	48.1%	24.1%	19.6%	15.2%
Customers >$1M ARR	240	387	523	642
YoY Growth	71.4%	61.3%	35.1%	23.0%
Source: Zscaler SEC Filings, Investor Presentations 3

4. Growth Drivers & Opportunities

Zscaler’s future growth is underpinned by a multi-faceted strategy focused on deepening its penetration within existing customers, expanding its platform to address new market segments, and growing its global and vertical market footprint.

4.1. The “Land and Expand” Flywheel

The “land and expand” motion remains the primary engine of Zscaler’s growth. The strategy is predicated on securing an initial deal with a large enterprise—the “land”—and subsequently expanding the relationship over time by demonstrating value and solving additional business problems.

• Upselling and Cross-selling: Growth within an account is achieved through two primary vectors. First is upselling, where a customer upgrades to a more advanced and higher-priced feature bundle within a product pillar they already own (e.g., adding advanced data protection capabilities to their ZIA subscription). The second, and more significant, vector is cross-selling entirely new product pillars. A customer that successfully deploys ZIA for secure internet access becomes a highly qualified lead for ZPA to replace their legacy VPNs, ZDX to improve employee digital experience, and so on.³³
• Quantifiable Opportunity: The company has quantified this opportunity, stating there is a potential 6x upsell opportunity just within its user-focused pillars, highlighting the significant runway that remains even within its large installed base.⁶ The consistent growth in customers with ARR greater than $1 million—up 23% year-over-year in Q3 FY25 to 642—is direct evidence of this flywheel’s effectiveness.⁶

4.2. Emerging Product Vectors

A critical component of Zscaler’s long-term strategy is the expansion of its platform beyond its core user-centric security offerings. These emerging product areas are key to increasing the company’s total addressable market (TAM) and deepening its competitive moat.

• Growing Contribution: The success of this strategy is evident in the financial results. In fiscal 2024, emerging products contributed approximately 22% of new and upsell business, a notable increase from 18% in fiscal 2023. The company expects this contribution to grow into the mid-20% range in fiscal 2025, demonstrating accelerating adoption of the broader platform.⁵⁷
• Zscaler Digital Experience (ZDX): This solution represents a strategic expansion beyond pure cybersecurity. ZDX provides end-to-end visibility into application and network performance from the end-user’s perspective. This allows IT helpdesks to rapidly diagnose and resolve performance issues, whether they stem from the user’s device, their local network, the internet, or the application itself. This capability elevates Zscaler’s value proposition from a security-focused tool for the CISO to a broader operational and productivity tool for the CIO.⁹
• Zero Trust for Workloads (Cloud Protection): This is a major strategic initiative aimed at securing communications between applications and workloads, both within public cloud environments (like AWS and Azure) and traditional data centers. This moves Zscaler into the large and growing Cloud Workload Protection Platform (CWPP) and microsegmentation markets, enabling customers to enforce Zero Trust policies for their critical application infrastructure.⁸
• Data Protection: This pillar has become one of the fastest-growing areas of the business, driven by a powerful new catalyst: the explosion of generative AI. Enterprises are acutely aware of the risk that employees could leak sensitive corporate data into public AI tools like ChatGPT. Zscaler’s data protection solutions are designed to provide the visibility and control necessary to mitigate these risks, making it a top priority for CISOs.⁴³

4.3. International and Vertical Expansion

• Global Opportunity: While Zscaler is a global company, with approximately half of its revenue coming from outside the Americas, there remains a significant opportunity to deepen its penetration in key international markets across Europe, the Middle East, and Africa (EMEA) and the Asia-Pacific (APJ) region.³
• Public Sector Growth: The public sector, particularly the U.S. Federal government, represents a major growth vector. The 2021 Executive Order on Improving the Nation’s Cybersecurity created a powerful mandate for federal agencies to adopt Zero Trust architectures. Zscaler has successfully capitalized on this, securing contracts with 12 of the 15 cabinet-level agencies and seeing strong growth in its federal business.⁵² The company is now actively replicating this go-to-market playbook in other countries that are adopting similar government-wide cybersecurity modernization initiatives.⁵⁹
• Vertical Specialization: To drive deeper penetration in the enterprise market, Zscaler is sharpening its focus on specific industry verticals, including financial services, healthcare, and manufacturing. This involves hiring domain experts who understand the unique security challenges and regulatory requirements of these industries, allowing for more tailored and effective sales and marketing efforts.⁵⁹

4.4. Strategic Mergers and Acquisitions (M&A)

Zscaler employs a disciplined “tuck-in” acquisition strategy, focusing on acquiring smaller, early-stage technology companies to accelerate its product roadmap and acquire specialized engineering talent.³ This approach allows the company to rapidly integrate new capabilities into its platform rather than managing large, complex integrations of mature businesses.

Recent notable acquisitions include:

• Avalor and Airgap Networks (2024): These acquisitions were made to bolster the company’s data security and cloud protection pillars. Avalor brought Data Security Posture Management (DSPM) capabilities, while Airgap Networks provided technology for Zero Trust segmentation of internal local area networks (LANs), a key component of the “Zero Trust Branch” strategy.⁵
• Red Canary (Announced May 2025, Completed August 2025): This represents a more significant strategic acquisition, with a reported price of $675 million. Red Canary is a leader in Managed Detection and Response (MDR) and threat hunting. This acquisition is intended to accelerate Zscaler’s innovation in AI-powered security operations, allowing it to offer more advanced threat detection and response capabilities directly from its platform.⁶

The evolution of Zscaler’s corporate messaging and product strategy reveals a deliberate and critical pivot. The company built its initial success and market leadership on securing the modern workforce—the “user-to-app” and “user-to-internet” connections that defined the shift to cloud and mobility. This was the story of ZIA and ZPA. However, as this market has matured and competition has intensified, sustaining a high-growth trajectory requires expanding the battlefield.

The company’s “Zero Trust Everywhere” strategy is the manifestation of this pivot. It is a strategic imperative to apply the same core Zero Trust principles that were successful for users to every other connection point in the enterprise. The “Zero Trust for Workloads” pillar takes the fight directly into the data center and the public cloud, challenging a different set of competitors and significantly expanding the company’s TAM. Similarly, the “Zero Trust for Branch” initiative is a direct assault on the core business of legacy firewall vendors and a counter-move to their “single-vendor SASE” narrative. By offering a solution that can secure branch office traffic without the need for on-premises firewalls, Zscaler is attempting to cannibalize an adjacent market to fuel its next wave of growth. This strategic expansion is not just an opportunity but a necessity. It allows Zscaler to dramatically increase its addressable market, further entrench its platform within its customer base (thereby raising switching costs), and build a more comprehensive platform narrative to effectively compete with the “all-in-one” claims of its largest rivals. The recent acquisitions are tactical accelerants for this overarching strategic pivot.

5. Capital Allocation & Management Quality

5.1. Leadership and Vision

Zscaler is a founder-led company, a characteristic often associated with a strong, long-term strategic vision and deep product expertise. Chairman and CEO Jay Chaudhry is a highly regarded and successful serial entrepreneur in the cybersecurity space, having founded and successfully exited four other security companies before Zscaler.⁶⁴ This track record provides significant credibility with customers, partners, and investors. Chaudhry and his family maintain a substantial ownership stake in the company (approximately 35% of shares outstanding as of early 2024), which creates a powerful alignment of interests with common shareholders.⁴⁵

The broader executive team is composed of seasoned industry veterans. In May 2025, the company appointed a new Chief Financial Officer, Kevin Rubin, who brings extensive experience as a public company CFO at firms like Alteryx and BetterUp.⁶⁶ This and other recent executive appointments in marketing and technology are indicative of a company building out its leadership team to manage its next phase of growth toward its goal of $5 billion in ARR and beyond.⁶⁷

5.2. Capital Allocation Priorities

Zscaler’s capital allocation strategy is squarely focused on reinvesting for growth to capture its large market opportunity. The company does not pay a dividend or have a share repurchase program, instead directing its capital toward organic innovation, market expansion, and strategic acquisitions.

• Research and Development (R&D): Investment in R&D is a top priority, reflecting the need to maintain a technological edge in the fast-moving cybersecurity market. R&D expenses have consistently represented a significant portion of revenue, ranging from 23% to 28% between fiscal 2020 and fiscal 2024.⁶⁸ This sustained high level of investment fuels the organic development of new platform capabilities and enhancements.
• Sales and Marketing (S&M): As an enterprise-focused company with a complex sales process, S&M constitutes Zscaler’s largest operating expense. In fiscal 2024, S&M expenses were $997.7 million, or 46% of revenue. While this percentage is high, it has shown a clear downward trend from 49% in fiscal 2023 and 51% in fiscal 2022, demonstrating improving sales efficiency and operating leverage as the company scales.³
• Mergers and Acquisitions (M&A): The company utilizes its strong balance sheet to make strategic “tuck-in” acquisitions of early-stage companies to acquire key technologies and engineering talent, as seen with its recent purchases of Avalor, Airgap Networks, and Red Canary.³
• Balance Sheet Management: Zscaler maintains a robust cash and investments position, providing ample liquidity for operations and strategic flexibility. The company has utilized convertible debt as a low-cost source of capital but maintains an overall conservative approach to leverage.⁵⁶

5.3. Shareholder Alignment and Governance

The high level of insider ownership by the founder and CEO provides a strong foundation for shareholder alignment. However, a key consideration for investors is the company’s significant use of stock-based compensation (SBC).

• Stock-Based Compensation: SBC is a major non-cash expense for Zscaler and is the primary driver of the difference between its GAAP and non-GAAP profitability.⁴⁵ For the six months ended January 31, 2025, SBC and related payroll taxes totaled $336.9 million.⁷¹ While SBC is a common tool used by high-growth technology companies to attract and retain talent, its high level can lead to meaningful dilution for existing shareholders over time. Investors should monitor the trend of SBC as a percentage of revenue and the growth in fully diluted shares outstanding.
• Institutional Ownership: Zscaler is widely held by a diverse base of institutional investors, reflecting broad market confidence in its management team, strategy, and long-term prospects.

6. Recent Challenges & Industry Headwinds (2022-2024)

The period from 2022 through 2024 was characterized by a more challenging macroeconomic environment, marked by rising interest rates, inflation, and concerns about a potential recession. This environment created several headwinds for Zscaler and the broader enterprise technology sector.

6.1. Macroeconomic Impact on IT Budgets

Throughout fiscal 2023 and into fiscal 2024, Zscaler’s management consistently referenced a “challenging macro environment” in their public communications.⁵⁹ This manifested primarily in changes to customer purchasing behavior:

• Elongated Sales Cycles and Increased Scrutiny: Enterprises became more cautious with their IT spending. Large deals, in particular, faced “sustained high levels of deal scrutiny” and required more layers of executive and financial approval, leading to longer and more unpredictable sales cycles.⁴⁹ This was a common theme across the enterprise software industry during this period.
• Impact on Billings: This increased deliberation on large purchasing decisions had a tangible impact on billings in certain quarters, as some large deals were pushed out.⁴⁹
• Resilience of Security Spending: Despite these headwinds, management also consistently affirmed that cybersecurity remained the number one IT spending priority for most organizations. The constant barrage of high-profile breaches and the strategic importance of digital transformation initiatives meant that budgets for critical security projects like Zero Trust adoption were more resilient than other areas of IT spending.⁴⁷

6.2. Go-to-Market Execution and Adjustments

In response to the shifting environment, Zscaler made several adjustments to its go-to-market strategy.

• Sales Reorganization: In late 2022 and early 2023, the company undertook a reorganization of its sales force to better align its teams by geography and customer segment. While this created some short-term disruption, management positioned it as a necessary step to build a more scalable organization capable of reaching its long-term goal of $5 billion in ARR.⁵²
• Emphasis on ROI and Vendor Consolidation: Recognizing the increased focus on costs from customers, Zscaler sharpened its value proposition. The company launched a formal “cost takeout program” and increased its emphasis on developing “CFO-ready business cases” for its customers. This sales motion explicitly highlights the return on investment (ROI) of the Zscaler platform by quantifying the cost savings from eliminating multiple legacy point products, such as firewalls, VPNs, and web proxies.⁴⁴

6.3. Competitive Pressures

The 2022-2024 period also saw an intensification of competitive pressures, particularly from large, established security vendors.

• The SASE Platform Battle: Competitors, most notably Palo Alto Networks, became more aggressive in marketing their “single-vendor SASE” platforms. This created more competitive noise in the market and forced Zscaler to more clearly articulate the architectural advantages of its best-of-breed SSE approach versus the integrated but potentially less capable offerings of its rivals.⁴⁵
• Aggressive Pricing: Palo Alto Networks, in particular, was noted to be using aggressive pricing and bundling strategies to win large platform deals, creating a more challenging pricing environment for Zscaler and other vendors in the space.⁴⁵

While the macroeconomic slowdown of 2022-2024 presented clear headwinds in the form of longer sales cycles and increased budget scrutiny, it paradoxically served as a powerful catalyst that reinforced Zscaler’s long-term value proposition. In a stable economic environment, enterprises might be slower to decommission legacy systems that are perceived as “good enough.” However, when CFOs begin to scrutinize every line item of the IT budget, the calculus changes. The pressure to reduce costs and improve operational efficiency forces CIOs and CISOs to confront the high total cost of ownership (TCO) of their sprawling, complex, and often redundant legacy security stacks.

This environment played directly into Zscaler’s core strategic narrative. A key tenet of the company’s sales pitch has always been vendor consolidation and cost reduction. The Zscaler platform is explicitly designed to allow customers to eliminate a wide array of expensive point products and the associated hardware, maintenance, and personnel costs.⁵ The economic pressure, therefore, transformed the conversation with many customers from a purely technical discussion about security efficacy to a financial discussion about ROI and TCO. This shift accelerated the secular trend of vendor consolidation, which is a powerful tailwind for platform-centric companies like Zscaler. The company’s ability to continue growing its revenue by over 30% during a period when many other software companies saw their growth rates plummet is a strong testament to the mission-critical nature of its offering and the compelling financial argument it could make to budget-conscious executives.

7. Valuation Analysis

Zscaler’s position as a high-growth market leader is reflected in its premium valuation multiples. The analysis of these multiples relative to historical ranges and a peer group of other high-quality software and cybersecurity companies is essential for contextualizing the market’s expectations for the company’s future performance.

7.1. Current and Historical Multiples

Due to its history of GAAP net losses, traditional valuation metrics like the Price-to-Earnings (P/E) ratio are not meaningful for Zscaler on a trailing basis.⁷³ Instead, valuation is more appropriately assessed using multiples based on revenue and cash flow.

• Price-to-Sales (P/S) and EV/Sales: These are the most common metrics for valuing high-growth, unprofitable or newly-profitable software companies. As of mid-2025, Zscaler trades at a trailing twelve-month (TTM) P/S ratio of approximately 16.5x to 17.6x and a similar Enterprise Value-to-Sales (EV/Sales) ratio of around 16x to 17x.⁷⁵ While these multiples are high in absolute terms, they represent a significant compression from the peak levels seen in 2021, when the P/S ratio exceeded 50x.⁷⁸ The company’s 5-year average P/S ratio is approximately 27x, indicating that the current valuation is below its long-term historical average but still at a substantial premium to the broader market.⁷⁸
• Price-to-Free Cash Flow (P/FCF): As Zscaler is a strong generator of free cash flow, the P/FCF multiple provides a useful, profitability-based valuation lens. As of early 2024, the stock was trading at approximately 68 times its trailing-twelve-month free cash flow, a demanding multiple that reflects expectations of strong future growth in both revenue and cash flow margins.⁴⁵

7.2. Peer Group Comparison

Comparing Zscaler’s valuation to its direct competitors and other high-growth peers provides critical market context.

• Relative to Network Security Incumbents: Zscaler consistently trades at a significant valuation premium to its more mature, hardware-centric competitors like Palo Alto Networks and Fortinet. For example, as of mid-2025, Zscaler’s P/S ratio of ~17.6x was considerably higher than PANW’s (~13.0x) and Fortinet’s (~12.1x).⁷⁸ This premium reflects Zscaler’s superior revenue growth rate and its perceived leadership in the more modern, cloud-native segment of the market.
• Relative to Cloud-Native Peers: When compared to other high-growth, cloud-native security leaders, Zscaler’s valuation is more nuanced. Its P/S ratio is generally lower than that of CrowdStrike (~27.1x), which has historically maintained a higher growth rate.⁷⁸ Its forward non-GAAP P/E ratio of ~80.8x is also lower than CrowdStrike’s (~118.0x) but higher than many other high-growth SaaS companies like ServiceNow (~51.0x) and Datadog (~68.9x).⁷⁹
• Interpretation: The market appears to be valuing Zscaler as a top-tier, high-growth software company, awarding it a significant premium over legacy incumbents but a slight discount to the very highest-growth players in the cloud-native space. This positioning reflects its strong financial profile, market leadership, and moderating, but still robust, growth rate.

7.3. Valuation Drivers and Sensitivity

The sustainability of Zscaler’s premium valuation is contingent on several key factors and is highly sensitive to changes in performance and market sentiment.

Factors Supporting the Valuation:

1. Market Leadership: Zscaler is the established leader in the large and rapidly growing Zero Trust and SASE markets.
2. Strong Financial Profile: The combination of 20%+ revenue growth and 20%+ free cash flow margins places it in an elite category of software companies.
3. Durable Competitive Moat: Its unique architecture, global scale, and high customer switching costs provide a defensible competitive advantage.
4. Large and Expanding TAM: The company has a significant runway for future growth through platform expansion into adjacent markets like cloud workload protection and data security.

Key Sensitivities and Risks to the Valuation:

• Growth Deceleration: The valuation is highly sensitive to the rate of revenue and billings growth. Any acceleration in the pace of deceleration beyond market expectations would likely trigger a significant contraction in its valuation multiples.
• Competitive Execution: The valuation is predicated on Zscaler maintaining its leadership position. Any evidence that competitors like Palo Alto Networks are making significant and sustained market share gains at Zscaler’s expense would challenge the core investment thesis.
• Margin Performance: A failure to continue demonstrating operating leverage and expanding margins would call into question the company’s long-term profitability targets and ability to justify its growth-oriented valuation.
• Interest Rates and Market Sentiment: As a high-duration asset whose value is heavily weighted toward future cash flows, Zscaler’s stock is particularly sensitive to changes in the macroeconomic environment, especially interest rates and overall investor risk appetite for growth stocks.

Company	Ticker	Market Cap (USD)	EV/Sales (TTM)	P/FCF (TTM)	Forward P/E (Non-GAAP)	Revenue Growth (TTM)	FCF Margin (TTM)
Zscaler, Inc.	ZS	$42.8B	16.8x	47.1x	80.8x	27.8%	28.8%
Palo Alto Networks	PANW	$117.0B	14.1x	47.8x	56.3x	18.2%	39.2%
Fortinet, Inc.	FTNT	$60.1B	10.7x	31.9x	29.3x	14.8%	33.7%
CrowdStrike Holdings	CRWD	$108.6B	27.1x	81.3x	118.0x	31.2%	31.9%
Cloudflare, Inc.	NET	$70.0B	31.6x	167.3x	240.7x	30.9%	12.8%
Datadog, Inc.	DDOG	$43.5B	18.1x	100.2x	68.9x	25.8%	29.3%
Note: Data as of mid-2025, compiled from various sources. Market data is dynamic and subject to change. 74

8. Risk Factors

A thorough analysis of Zscaler requires a comprehensive understanding of the risks outlined in its regulatory filings. The company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2024, details numerous risk factors that could materially impact its business, financial condition, and future results.³

8.1. Business and Competitive Risks

• Intense Competition: The network security market is exceptionally competitive and is characterized by rapid technological innovation. Zscaler competes against large, well-established incumbents like Palo Alto Networks, Fortinet, and Cisco, which possess greater financial resources, broader product portfolios, and larger sales organizations. These competitors can leverage their existing customer relationships and engage in aggressive pricing and bundling to win deals.³
• Market Adoption and Execution: The company’s success is contingent on the continued enterprise adoption of cloud-native Zero Trust security architectures over traditional on-premises solutions. A slowdown in this market transition or a failure to effectively market and sell the benefits of its platform could impede growth. Furthermore, a substantial portion of revenue is generated through channel partners, and any disruption to these relationships or poor performance by partners could adversely affect sales.³
• Customer Concentration and Retention: While Zscaler serves a large number of customers, its business is increasingly reliant on securing and expanding relationships with very large enterprise customers. The failure to retain these key accounts or to continue expanding their spend through the “land and expand” model would materially harm future revenue growth. The recent moderation in the dollar-based net retention rate highlights the importance of this risk.³
• Managing Growth: Zscaler’s rapid growth places a significant strain on its management, operational, and financial infrastructure. The inability to effectively scale its operations, hire and retain key talent, and maintain its corporate culture could lead to execution missteps and harm the business.³

8.2. Technology and Operational Risks

• Platform Availability and Performance: Zscaler’s platform is a mission-critical, inline service for its customers. Any significant service interruption, outage, or performance degradation could have a severe impact on customers’ business operations, leading to financial penalties, loss of customers, and significant reputational damage.³
• Security Breaches: As a leading cybersecurity company, Zscaler is a high-profile target for sophisticated cyber threat actors. A security breach of its own platform or internal corporate systems would be particularly damaging, potentially catastrophic, to its reputation and customer trust.³
• Pace of Innovation: The cybersecurity landscape evolves at a relentless pace. Zscaler must continue to invest heavily in R&D to innovate and enhance its platform, particularly in areas like AI and machine learning, to keep pace with emerging threats and competitor offerings. A failure to do so could result in product obsolescence and loss of market share.³
• Reliance on Third-Party Infrastructure: The Zscaler platform operates out of a global network of data centers and relies on third-party internet service providers and network infrastructure. Any failure or disruption in these third-party services could impact the availability and performance of Zscaler’s platform.³

8.3. Financial and Regulatory Risks

• History of GAAP Net Losses: The company has a history of incurring net losses on a GAAP basis and has stated that it expects to continue making significant investments that could result in future net losses. While the company is trending toward GAAP profitability, there is no guarantee it will be able to achieve or sustain it.³
• Premium Valuation: The company’s stock trades at high valuation multiples. This valuation is predicated on expectations of continued high growth and profitability. Any failure to meet these expectations could result in a significant and rapid decline in the stock price.⁴⁵
• Data Privacy and Cybersecurity Regulations: Zscaler’s global operations subject it to a complex and evolving web of international and domestic laws and regulations regarding data privacy, data protection, and cybersecurity, such as the GDPR in Europe. Complying with these regulations is costly, and any failure to comply could result in significant fines, penalties, and reputational harm.³

9. Key Metrics & KPIs to Monitor

To effectively monitor Zscaler’s performance and the ongoing validity of the investment thesis, investors should focus on a core set of financial and operational key performance indicators (KPIs). These metrics provide insight into the company’s top-line momentum, the success of its platform adoption strategy, and its progress on profitability and efficiency.

9.1. Top-Line Momentum

• Calculated Billings Growth: This is arguably the most important leading indicator of the company’s near-term health. It represents the revenue from new subscription agreements plus the value of renewals and upsells in a given period. A sustained acceleration or deceleration in billings growth will typically precede a similar move in revenue growth by several quarters.
• Remaining Performance Obligations (RPO) Growth: RPO measures the total value of contracted but not-yet-billed revenue. It provides a longer-term view of the company’s contracted business pipeline. Strong RPO growth indicates good visibility into future revenue streams.
• Revenue Growth: While a lagging indicator compared to billings and RPO, the year-over-year revenue growth rate remains the ultimate measure of top-line performance. Monitoring the rate of deceleration is crucial for assessing whether the company is meeting the high expectations embedded in its valuation.

9.2. Customer Success & Platform Adoption

• Dollar-Based Net Retention Rate (NRR): This is the single most critical metric for evaluating the success of the “land and expand” strategy. It quantifies how much the average existing customer is increasing their spending year-over-year. A stable or re-accelerating NRR would be a powerful positive signal, while a continued decline, particularly below the 110% level, could indicate increased churn, down-sells, or a maturing upsell opportunity.
• Growth in Large Customers (>$1M ARR): This metric tracks Zscaler’s success in penetrating the largest and most valuable enterprise accounts. Continued strong growth in this cohort is essential for driving large-scale revenue growth.
• Contribution from Emerging Products: This KPI is the best indicator of the success of the broader “Zero Trust Everywhere” platform strategy. An increasing percentage of new and upsell business coming from products beyond the core ZIA and ZPA pillars is critical for sustaining long-term growth and validating the platform’s expansion.

9.3. Profitability and Efficiency

• Free Cash Flow (FCF) Margin: This is the key metric for assessing the company’s cash-generating ability and overall financial health. Continued expansion of the FCF margin while maintaining strong growth is the primary driver of the company’s ability to exceed the “Rule of 40.”
• Non-GAAP Operating Margin: This metric provides the clearest view of the company’s progress toward its long-term profitability targets by stripping out the noise of non-cash charges like stock-based compensation. Consistent expansion demonstrates operating leverage.
• Sales & Marketing Expense as a Percentage of Revenue: This serves as a useful proxy for customer acquisition efficiency. A continued downward trend in this ratio over time is a positive sign that the company is scaling its go-to-market motion efficiently.

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