Bernstein revised its stance on a major cybersecurity provider on Friday, moving the stock back to an Outperform rating and pointing to a material valuation gap versus peers. Analyst Peter Weed quantified the opportunity as a "straightforward 35% upside potential" for Zscaler, while trimming the firm's price target to $228 from $264.
The upgrade follows a December downgrade driven by concerns around the sustainability of the company’s prior growth cadence and intensifying competition. Bernstein had been cautious because it saw the company’s ability to sustain "20%+ growth duration" under question.
Weed's note called out a meaningful change in customer dynamics: net new customer contribution has declined to roughly 30% and is expected to remain at that lower level. Bernstein warned that this trend "starts to strangle NRR, as expansion in existing customers tends to hit natural headroom," signaling potential pressure on future expansion revenue.
The analyst also listed specific drivers of earlier caution: heightened competitive pressure, narrative issues arising from the Red Canary acquisition, and broader concerns about the company’s long-term growth path. Bernstein quantified downside scenarios, noting growth could slip "below 20% by '28 and through 15% within 5 years."
Despite these headwinds, Bernstein concluded that the stock’s valuation appears excessively depressed relative to peers. The firm compared Price to NTM free cash flow versus NTM growth across cybersecurity vendors and found Zscaler to be "massively washed out."
Bernstein emphasized indicators of franchise resilience: retention rates in the high 90% range, net revenue retention at or above 115%, and positive channel checks. Those metrics underpin the firm’s view that "this company is not dying" and support the decision to upgrade.
In its revised view, Bernstein stressed customer stickiness and characterized artificial intelligence as a tailwind rather than a risk. The firm singled out the February 26 earnings report as a potential catalyst for a market re-rating.
Contextual implications
- Valuation: Bernstein believes Zscaler is materially undervalued relative to other cybersecurity peers when measured by Price to NTM FCF against growth expectations.
- Fundamentals: High retention and above-115% net revenue retention suggest durability in the installed base despite softer net new contribution.
- Event risk: The upcoming earnings release on Feb. 26 could alter investor perceptions and act as a catalyst for repricing.