Hook & thesis
The recent sell-off across software names after the launch of AI tools that aim to compress multiple point solutions has scared a lot of money out of the market. That panic is a blunt instrument: it hits both fragile point products and mission-critical platforms alike. Zscaler (ZS) sits firmly in the latter camp. The stock has retraced from last year's highs and now trades near $171.97, but the company's economics and strategic positioning argue that this weakness is a buying opportunity rather than a time to surrender market share.
My trade idea: go long ZS at $172.00 with a stop at $158.00 and a target of $210.00 on a mid-term horizon of 45 trading days. The rationale is simple - Zscaler is a cash-generating, deeply integrated zero-trust platform with product momentum (SquareX acquisition) and adoption among large enterprises. The market is over-discounting the firm's durability because of a broad software panic; technicals (RSI ~30.5) and stretched short-term sentiment amplify the bounce potential.
What Zscaler does and why it matters
Zscaler operates a cloud-native Zero Trust Exchange that replaces legacy perimeter tools like VPNs and firewalls. Its product set includes Zscaler Internet Access, Zscaler Private Access, Zscaler Client Connector, cloud protection, digital experience monitoring, and now browser-focused capabilities via the SquareX acquisition announced on 02/05/2026. Organizations pay Zscaler to broker and inspect traffic securely at scale - that makes the product mission-critical infrastructure for cloud-first enterprises.
Why should the market care? Zero-trust is a structural shift in enterprise security: rather than trusting the network, security follows the user and the application. Zscaler claims meaningful penetration with large enterprises - public comments from leadership point to adoption across a large slice of the Fortune 500 - and management highlights Net Promoter Scores in the 75-85 range, which is exceptionally high for enterprise SaaS. That stickiness quality matters when customers evaluate replacing incumbent, on-prem solutions.
Data-backed reasons to prefer Zscaler now
- Valuation & cash generation: Market capitalization sits near $27.4 billion. On a cash-flow basis the company is generating tangible free cash flow - the reported free cash flow is $924.86 million. That implies a FCF yield in the low single digits (~3.4%) at current market value, giving the stock a floor that many growth-only SaaS names lack.
- Balance sheet signal: Zscaler's current ratio is 1.82 and debt-to-equity is 0.86. The company is not balance-sheet stressed and carries manageable leverage for a software company investing in growth and M&A.
- Technical support and sentiment: The stock is trading near its 52-week low of $162.873 (02/09/2026) and well off the 52-week high of $336.99 (11/03/2025). The short-term RSI of ~30.5 signals oversold conditions, and short interest has risen to roughly 7.68 million shares (settlement 01/30/2026) with days-to-cover around 4.1 - conditions that can accelerate a rebound once selling abates.
- Strategic moves: The SquareX acquisition (02/05/2026) extends Zscaler's Zero Trust posture into the browser via lightweight extensions, addressing a major vector for AI-era SaaS and reducing the need for heavier agents or third-party browsers. That expands the addressable security surface Zscaler can monetize.
Valuation framing - why the multiple is tolerable
On headline multiples Zscaler still looks expensive: price-to-sales sits around 10x and price-to-book around 14.3x. Trailing EPS is negative (-$0.26), so traditional earnings multiples don't tell the whole story. But valuation must be weighed against how mission-critical the product is, the company's cash generation, and the long-term market opportunity. Independent research suggests the ZTNA market can expand materially (a cited forecast projects a rise from $2.48B in 2025 to $14.74B by 2033), and Zscaler is one of the highest-profile pure plays in that category.
Relative to its own history, the stock's fall from $336.99 to ~$172 is a de-rating driven more by sentiment than by the underlying balance sheet: Zscaler still generates nearly $925M of free cash flow and serves a large roster of enterprise customers. If revenue and ARR growth re-accelerate modestly or margin leverages improve, the current valuation allows for double-digit upside without dramatic multiple expansion.
Catalysts to drive the trade
- SquareX integration and early customer wins (announced 02/05/2026) showing practical value in browser-based zero trust - early adoption news or customer case studies can re-rate the name.
- Normalization after the AI-related software sell-off (news cycle peaked 02/11/2026) - once investors digest which vendors are mission-critical vs. replaceable, defensive, sticky names like Zscaler tend to separate from the pack.
- Improving macro signals for enterprise security spend or a positive enterprise IT data point (procurement comps, large renewals) that shows customer budgets are intact.
- Technical squeeze: short-volume has been elevated on several days; a controlled bounce could trigger short covering and amplify the upside in the mid term.
Trade plan (actionable)
Horizon: mid term (45 trading days). Expect this trade to play out over roughly two months; that window is long enough for sentiment to stabilize after the AI panic and for early integration wins from SquareX to be announced or highlighted.
| Item | Level |
|---|---|
| Trade direction | Long |
| Entry | $172.00 |
| Stop Loss | $158.00 |
| Target | $210.00 |
| Time horizon | mid term (45 trading days) |
Position sizing & risk-management notes
Given the stock's volatility and recent sell-off, limit any initial position to a size consistent with a medium-risk trade: risk no more than 1-2% of portfolio capital on the stop loss defined. Trail the stop to break even once the trade is up ~20% and tighten to capture gains if momentum accelerates.
Risks & counterarguments
This is not a no-risk setup. Below are the principal risks that could invalidate the thesis, followed by a counterargument to balance the case:
- Broader SaaS re-rating persists: If AI-driven consolidation continues to disproportionately hit platform multiples, Zscaler could see further multiple compression even if cash flows remain positive.
- Slowing ARR growth or margin compression: The company’s growth profile matters. A sustained slowdown in net-new ARR or heavier-than-expected investment to integrate SquareX could pressure the stock.
- Competitive pressure: Other security vendors (agent-based or telemetry-first companies) could accelerate product roadmaps or leverage AI features that blunt Zscaler's differentiation, particularly in cloud workload protection.
- Security breach or major outage: As a security vendor, operational lapses are existentially damaging. Any high-profile breach or reliability problem would materially impair confidence and renewals.
- Technical momentum remains negative: MACD shows bearish momentum and daily trading volumes remain elevated on heavy selling days. These technicals can prolong weakness and test lower support levels before a sustainable rebound.
Counterargument
Critics will argue that AI-driven multi-function tools (like the Claude Cowork product discussed in the market narrative on 02/11/2026) could reduce the number of discrete security vendors a company needs, compressing vendor stacks and reducing spend. That is a valid long-term threat: if customers migrate to a bundled AI platform that includes hardened security primitives, incumbents could see revenue pressure. However, enterprise security remains highly regulated and complex; many CIOs prefer best-of-breed, validated controls for critical access management. Zscaler's deep integrations, high NPS scores, and large enterprise footprint make it harder to displace quickly. In short: consolidation risk exists, but the path is long and conditional - not immediate.
What would change my mind
I will re-evaluate the trade if any of the following occur within the next 45 trading days:
- Material evidence of churn at large customers or a sharp falloff in net-new ARR growth announced by the company or revealed through customer surveys.
- A security incident attributable to Zscaler services that meaningfully erodes trust among core customers.
- Macro evidence that enterprise security budgets are being cut deeply and permanently in ways that cannot be offset by product expansion.
Conclusion - clear stance
My stance is a tactical long. The headline numbers - market cap ~$27.4 billion, meaningful free cash flow (~$925 million), current ratio ~1.82 - and the company’s entrenched role in enterprise zero-trust create an asymmetric upside if sentiment normalizes. The entry at $172.00 gives a favorable risk/reward with a stop at $158.00 and target of $210.00 over a mid-term (45 trading days) window. This is a trade, not a long-term buy-and-forget position: watch ARR trends, integration progress on SquareX, and any signs of customer churn. If those fundamentals hold, the current panic presents a disciplined opportunity to buy a leader at a meaningful discount to where it traded months ago.
Trade idea summary: Long ZS at $172.00, stop $158.00, target $210.00; mid term (45 trading days); risk level medium. Watch ARR, SquareX integration, and potential security incidents closely.