Shares of Zscaler (ZS 0.75%) have defied the broader stock market weakness in 2025 by registering impressive gains of 62% to investors so far this year, and it looks like this impressive rally is here to stay following the release of the company's latest quarterly results.
On May 29, the cybersecurity specialist reported results for its fiscal 2025's third quarter (ended April 30). Both revenue and earnings topped consensus estimates, and the company also raised its full-year forecast. Zscaler stock shot up nearly 10% on the day following its earnings release.
But is there more upside in store for Zscaler following its impressive run this year? Let's find out.
Image source: Getty Images.
An improving revenue pipeline points toward stronger growth ahead
Zscaler's top line jumped 23% year over year in the previous quarter, while its earnings increased by 18%. The slower growth in Zscaler's bottom line last quarter can be attributed to the company's focus on aggressively bringing new products to the market to capture a bigger share of the end-market opportunity. Zscaler says that its new offerings are "optimized for faster go-to-market rather than margins," and the company will focus on enhancing its margins once they scale up.
The company's strategy of prioritizing market share gains is going to reap rewards in the future as it is helping the company bolster its revenue pipeline. This is evident from the 30% year-over-year growth in its remaining performance obligations (RPO) last quarter to almost $5 billion. RPO refers to the total value of a company's contracts that are yet to be fulfilled at the end of a quarter. So, the stronger growth in this metric when compared to Zscaler's revenue is proof that it is winning contracts at a faster pace than it is fulfilling them.
After all, the total contract value of Zscaler's bookings in the previous quarter was more than $1 billion. Also, the company's RPO is nearly double the revenue it has generated in the past four quarters, which indicates that there is a strong likelihood of its growth rate getting better in the future. An important thing to note is that just over a third of Zscaler's annual recurring revenue of $2.9 billion now comes from emerging cybersecurity niches.
These three emerging categories are zero trust security, data security, and agentic artificial intelligence security solutions, and all of them are expected to grow at healthy rates in the long run. The zero trust security market, for instance, is expected to jump by over 4x between 2024 and 2033. On the other hand, the adoption of agentic AI in the cybersecurity space is forecast to increase at an incredible annual rate of almost 40% over the next decade.
So, it isn't surprising that Zscaler is now expecting stronger annual revenue growth of 23% in fiscal 2025, up by 1 percentage point from its earlier forecast. Analysts are expecting its revenue to increase by 20% in each of the next two fiscal years as well, as seen in the chart below. But it could end up doing better than that because of the bigger improvement in its revenue pipeline.
ZS Revenue Estimates for Current Fiscal Year data by YCharts
What's more, a potential improvement in Zscaler's margins in the future, when it starts optimizing its new products for margin growth, is likely to lead to a strong jump in its bottom line following a flat performance in the current fiscal year.
ZS EPS Estimates for Current Fiscal Year data by YCharts
So, it is clear that Zscaler is primed for stronger growth going forward. But will it be enough to justify the valuation?
The stock is expensive, but it could justify its valuation
Zscaler is trading at an expensive 79 times forward earnings, and its price-to-sales ratio of 18 isn't cheap either. These multiples are rich considering the pace at which Zscaler is currently growing, and the company will have to continue delivering stronger-than-expected growth and guidance in the future in order to maintain its premium valuation.
Fortunately, the company seems well-placed to do so. It has been winning more lucrative contracts by attracting new customers to its platform apart from winning a bigger share of existing customers' wallets. Also, the fast-growing cybersecurity niches that the company is targeting should allow it to continue expanding its revenue pipeline in the future and pave the way for stronger growth.
Growth-oriented investors should consider accumulating Zscaler stock, as it could head higher following its latest quarterly report on account of its improving growth prospects.
