Zscaler (ZS) has drawn fresh attention after user interest picked up around sector moves following Fortinet’s earnings, the company’s upcoming Q3 results on May 26, and new Zero Trust integrations including the IXT secure IoT platform.

Recent sector swings and Zscaler specific news have created sharp short term moves, with a 1 day share price return of 10.06% and 7 day share price return of 16.92%. Longer term performance is more mixed, including a year to date share price return of 30.73% decline and a 3 year total shareholder return of 32.38%. This combination suggests momentum has recently picked up even after a tougher year.

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With Zscaler trading at a discount to some analyst targets and estimates of intrinsic value, yet already reflecting expectations for strong revenue growth, the key question is whether the recent pullback signals a fresh entry point or if the stock already prices in potential future gains.

Most Popular Narrative: 11.5% Undervalued

According to the most followed narrative, Zscaler’s fair value estimate of $172.68 sits above the last close at $152.79, which helps frame the recent volatility in a different light.

Industry Tailwinds:

• Convergence of Networking and Security: As the internet becomes the new corporate network, Zscaler’s vision aligns with this trend.

• Zero Trust Approach: The shift toward zero-trust architecture is supportive of Zscaler’s solutions.

• Digital Transformation: Organizations increasingly rely on cloud-based services, supporting demand for Zscaler’s cloud security platform.

• Growing Cybersecurity Concerns: Rising threats increase demand for robust security solutions, including those using AI.

• Market Leadership: Zscaler’s established position and enterprise penetration are central to this narrative.

Want to see what revenue growth runway, margin shape, and future valuation multiple this narrative leans on? The full breakdown spells out the financial blueprint behind that fair value estimate.

Result: Fair Value of $172.68 (UNDERVALUED)

However, this narrative could be challenged if execution slips against rivals like Palo Alto Networks, or if weaker IT budgets limit demand for Zscaler’s cloud security platform.

Another View: Market Ratios Send A Different Signal

While the narrative and our DCF work suggest Zscaler looks undervalued, the P/S ratio tells a tighter story. At 8.2x P/S, the stock trades above both US Software peers at 3.7x and the peer group at 6.9x, yet only slightly below its 8.6x fair ratio. Is the discount big enough for the risk you are taking?

For a closer look at how this ratio compares with what our models suggest the market could move toward, See what the numbers say about this price — find out in our valuation breakdown.

Next Steps

With both bullish and cautious signals in play, it makes sense to move quickly, examine the details yourself, and carefully weigh the 2 key rewards and 1 important warning sign

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.