Hook & thesis
Zscaler delivered a quarter on 11/25/2025 that should remove ambiguity about its growth runway: revenues accelerated to $788.1M in the most recent quarter, operating cash flow is robust, and management is investing aggressively in growth initiatives. The result is a clearer structural story - durable ARR momentum with improving unit economics - that justifies a tactical long exposure while respecting valuation and execution risk.
My trade idea: buy into the stock on a mildly lower or current-price entry — defined risk, layered sizing, and profit-taking targets. The set-up favors a swing-to-position trade: upside if Zscaler continues to convert cloud security demand into ARR, but downside protection is essential given the sizable investing outflows and competitive landscape.
Business snapshot - what Zscaler actually does and why it matters
Zscaler is a cloud-native cybersecurity company focused on Zero Trust access. Its two commercial pillars are Zscaler Internet Access (secure access to external apps) and Zscaler Private Access (secure access to internal apps). Customers are moving away from appliance-driven perimeter security toward cloud-delivered Zero Trust architectures - an area where Zscaler sits squarely in the center.
Why the market should care: enterprises are shifting long-term spend from legacy appliances and point products into cloud security platforms that simplify operations and reduce threat surfaces. For a company built for cloud from day one, this secular shift supports multi-year ARR expansion and favorable gross margins compared with on-prem competitors.
What the numbers say - recent trends you can trust
- Top-line acceleration: most recent quarter revenue was $788.112M (filed 11/25/2025). That compares with $627.955M in the quarter a year earlier, an increase of roughly +25.5% year-over-year. The last four reported quarters sum to about $2.74B in revenue (TTM), implying consistent, material scale.
- Margins and profitability trajectory: gross profit in the most recent quarter was $603.359M (gross margin roughly 76.5%). Operating loss was relatively small at -$36.362M, indicating the company is near breakeven on an operating basis despite heavy reinvestment.
- Cash flow strength: net cash flow from operating activities was $448.28M in the quarter, showing strong cash conversion of growth — an important validation for subscription businesses.
- Investing spike: the company recorded -$1.502B in net cash flow from investing activities in the quarter, which materially depressed overall net cash flow for the period. That looks like one-off (or near-term) strategic spending — M&A or large platform investments — and is worth monitoring for returns on that capital.
- Balance sheet: the company reported assets of $6.503B and liabilities of $4.521B in the most recent report, with equity near $1.982B. Long-term debt sits in the neighborhood of ~$1.15B in recent filings.
Taken together, these figures tell a coherent story: expanding revenue at scale, very high gross margins consistent with a SaaS-security platform, improving operating results, and strong operating cash generation offset by a large investing outlay in the most recent quarter.
Valuation framing
Snapshot price on 01/15/2026: ~$210.58. Using diluted share count from the most recent quarter (about 158.6M shares), this implies a market capitalization around $33.4B.
Against trailing twelve-month revenue of ~ $2.74B, the company trades at roughly 12x revenue. For a high-growth cloud security platform showing 20%+ revenue growth, strong gross margins (mid-70s), and improving operating leverage, a ~10–15x revenue multiple sits within the historical band for large, growth SaaS names at this scale. The valuation is not “cheap” in absolute terms, but it becomes attractive if growth sustains, operating margins expand, and the recent investing outflow proves accretive to ARR and cross-sell.
Trade idea - actionable entry, stops and targets (primary trade)
Trade direction: Long
Time horizon: Swing-to-position
Risk level: Medium (see risk section)
| Action | Price band | Stop | Targets |
|---|---|---|---|
| Entry (layered) | $190 - $210 | Primary stop: $175 (conservative). If you prefer tighter risk, use $185 on initial small size. | Target 1: $260 (near-term swing, ~24% upside) |
| Add on confirmation | $210 - $235 | Target 2: $325 (position target if growth continues, ~54% from current) |
Sizing & risk management: start with a partial position on the lower band ($190–$200), add on a breakout above $235 or after the company proves the recent investments are driving ARR expansion. Limit portfolio exposure so a full stop hit (to $175) is a controlled, tolerable loss relative to your portfolio.
Catalysts that could drive the trade
- Quarterly results (next report) printing continued ARR/revenue acceleration and operating cash flow consistency — validates the growth-with-cash thesis.
- Positive commentary or proof points from investor presentations (company indicated it would present at conferences on 11/20/2025) that the recent large investing outflow is generating pipeline or tuck-in revenue.
- Industry expansion: macro demand for Zero Trust and cloud-delivered security continues to grow (recent market research cited the Zero Trust market expanding materially through the decade), which is an addressable tailwind for Zscaler.
- Evidence of cross-sell between ZIA and ZPA and lower churn as customers consolidate more security spend onto Zscaler's platform.
Risks & counterarguments
At least four material risks that could invalidate or materially impair the trade:
- Competition and pricing pressure - The cloud security market is intensely competitive with well-funded peers and adjacent platform providers. Increased price competition, feature parity, or enterprise preference for bundled vendors could slow net new ARR and compress margins.
- Investing outflow execution - The recent -$1.502B investing cash flow is sizable for one quarter. If that capital is directed to acquisitions or platform projects that don't convert to ARR or drive meaningful cross-sell, the company could face impairment charges, dilution, or prolonged margin pressure.
- Valuation sensitivity - At ~12x TTM revenue, the stock embeds healthy growth expectations. Failure to meet top-line acceleration or a macro pullback in IT spend could drive a sharp multiple contraction.
- Customer concentration / churn risk - Enterprise contracts can be large and lumpy; any material customer churn or elongated procurement cycles at large accounts would dent growth and cash flow.
- Debt & leverage profile - Long-term debt sits around the billion-dollar mark in recent filings. If operating performance deteriorates while the company services or extends debt, financial flexibility could be impaired.
Counterargument to the bullish thesis: One could reasonably argue Zscaler's latest quarter simply reflects near-term catch-up demand and that the company is investing aggressively precisely because organic acceleration is slowing elsewhere. If those investments fail to produce scale benefits (i.e., ARR growth that justifies the outlays), the firm's multiple could compress and returns would be poor. That is why the trade uses a defined stop and layered sizing.
What would change my mind
- I would reduce conviction materially if next quarter shows sequential deceleration in net new ARR or a meaningful uptick in churn.
- Evidence that the large investing outflow was followed by write-downs or acquisition-related impairment would force a reassessment.
- Conversely, sustained operating margin improvement toward profitability while keeping >20% top-line growth would increase my conviction and push target ranges higher.
Conclusion - clear path, but size the trade
Zscaler's most recent results make the growth path clearer: revenue acceleration, excellent gross margins, and robust operating cash flow create a credible story for durable SaaS-style scale. The big caveat is the sizable investing outflow in the quarter; it could be transformational if deployed well or a near-term encumbrance if not.
For traders and portfolio managers comfortable with medium risk: initiate a layered long between $190 and $210, protect the position with a $175 stop, and take profits in stages at $260 and $325. Keep position sizing modest until the company proves the investing spend converts into durable ARR expansion and margin progression.
Disclosure: This is a trade idea and not personalized investment advice. Always confirm current market prices and consult your own risk limits before acting.
Key dates referenced: Most recent quarter filing date 11/25/2025; snapshot price date 01/15/2026.