Zscaler’s Stock (ZS) in Correction Territory Ahead of Earnings: What To Expect

Zscaler Inc. (NASDAQ: ZS), a prominent player in cloud security, finds itself in a precarious position as it heads into its fiscal fourth-quarter 2025 earnings report tomorrow. With the US markets closed for labor day, ZS closed out last week at $277.05, a 1.15% dip from the previous day, firmly in correction territory from recent highs of early July.

Despite the recent pullback, with ZS more than 12% down from recent highs, the stock continues to trade 52.5% higher on a YTD basis. The question now is whether Zscaler can maintain its growth trajectory and justify its premium valuation in an increasingly competitive landscape.

Analysts are projecting earnings per share (EPS) of $0.80 on revenue of $707.14 million for the fourth quarter. These figures represent significant growth (+19.27% sales growth), but the market has already priced in considerable optimism. Zscaler's success hinges on not just meeting these expectations, but exceeding them and providing a strong outlook for fiscal year 2026.

CEO Jay Chaudhry emphasized the growing importance of AI security, positioning Zscaler as a prime beneficiary of this trend. The acquisition of Red Canary for $675 million further strengthens Zscaler's security operations capabilities.

While the consensus paints a picture of a company riding the wave of AI-driven security needs, a more cautious analysis suggests that Zscaler may be facing headwinds that are not fully appreciated by the market. The cloud security space is becoming increasingly crowded, with established players like Palo Alto Networks and CrowdStrike aggressively expanding their offerings.

Zscaler's reliance on a pure-play cloud security model, while initially a strength, could become a disadvantage as customers increasingly seek integrated security platforms that offer a broader range of services.

Furthermore, the acquisition of Red Canary, while strategically sound, introduces integration risks. Integrating a new company and its technology can be challenging and could potentially distract Zscaler from its core business. The company's net income decline from the previous year is also a factor to consider.

Ultimately, Zscaler's fate hinges on its ability to not only meet but exceed expectations in the upcoming earnings report. The company needs to demonstrate that it can maintain its growth momentum, successfully integrate its acquisitions, and navigate the increasingly competitive landscape.

Otherwise, the current correction could turn into a more significant downturn, leaving investors questioning whether the company's valuation is truly justified. The market will be paying close attention as earnings come after tomorrow's closing bell.