Zscaler, Inc. (ZS): Barclays raises Zscaler target to USD 220 ahead of Investor Day, expecting higher long-term margins and a broader product narrative

Overview

This report previews Zscaler's October 6 Investor Day. Barclays expects a reaffirmation of FY27 guidance, a potentially higher long-term margin target, and more evidence that Zscaler is evolving from a primarily ZIA/ZPA vendor into a broader zero-trust and data-security platform. Barclays retains Overweight and raises its target price to USD 220.

Core views

Barclays expects Zscaler to use its October 6 Investor Day to reinforce confidence in its medium-term financial outlook following the leadership transition in sales. The firm expects Zscaler to reiterate FY27 ARR guidance of USD 4,396-4,426 million after CRO Mike Rich's departure and Ross Tackett's appointment, effective October 1. Barclays believes Tackett's previous role leading worldwide sales means he helped shape the existing outlook. The company may also provide more detail on its aspiration to reach USD 10 billion in ARR, but Barclays views this as a more-than-five-year path: FY27 ARR is expected to be roughly USD 4.4-4.5 billion, making a target before FY30 difficult to underwrite. A central expected Investor Day development is an increase in Zscaler's long-term EBIT-margin target to 25-30%. The company has already exceeded its prior 20-22% long-term operating-margin objective, reporting 23% in FY26 and carrying a 23.7% estimate for FY27. Barclays argues that natural operating leverage, multi-product sales and favorable unit economics support a higher target. It points to historical customer-cohort economics disclosed at Zscaler's IPO, when the 2015 cohort moved from an 87% loss in year one to 65% contribution in year two and 68% in year three; Barclays believes retention, product breadth and pricing are likely at least as supportive now. The proposed 25-30% range would also move Zscaler closer to peer long-term operating-margin targets of 28-32% for CrowdStrike and low-to-mid-30% for Palo Alto Networks, while recognizing differences in businesses and end markets. Barclays also expects a deeper explanation of Zscaler's multi-product strategy and pricing evolution. ZIA and ZPA remain the core and likely the majority of the business, but the firm expects faster growth from Zero Trust Branch, Zero Trust Cloud, Data Security and Security for AI. In Barclays' view, a larger contribution from these offerings could diversify the company beyond its traditional ZIA/ZPA base and extend its growth curve. The product mix is also changing commercial models: Zero Trust Branch is device-based; Zero Trust Cloud uses workload or traffic measures; Data Security can be user- or volume-based; and Security for AI may be token- or consumption-based. The Investor Day could therefore clarify how pricing develops as non-user-based revenue becomes more important. The report stresses that Zscaler remains a heavily debated stock. Bears view it primarily as a ZIA/ZPA company facing increasing zero-trust and SASE competition from vendors including Palo Alto Networks, Netskope and private pure-play SASE providers, and worry that this competition will pressure the future growth trajectory. Bulls see potential benefits from increasing agentic traffic and consider Zscaler's valuation more palatable than larger security peers, noting year-to-date performance of -11% for ZS versus +110% for PANW, +120% for CRWD, +48% for HACK and +12% for the S&P 500. Barclays believes higher margin targets and a more developed discussion of later-stage growth opportunities could be modestly positive for sentiment and consensus expectations, but says materially faster growth would still be required to change views on the competitive bear case. Barclays raises its price target to USD 220 from USD 200 while maintaining Overweight. The new target applies about 30x Barclays' FY28 estimated free cash flow of about USD 1.1 billion, compared with about 27x on the same FY28 free-cash-flow estimate for the prior target. The firm believes higher long-term margin targets and greater visibility into products beyond ZIA/ZPA could improve sentiment around additional growth opportunities and justify a higher multiple. Its upside case is USD 240, assuming FY28 free cash flow is about 5% above its estimate and a roughly 31x multiple; its downside case is USD 150, assuming free cash flow is about 10% below estimate and a roughly 21x multiple. The underlying forecast shows revenue rising from USD 3.353 billion in FY26 to USD 3.923 billion in FY27, USD 4.491 billion in FY28 and USD 5.084 billion in FY29. Adjusted operating margin is forecast to improve from 22.9% in FY26 to 23.7%, 24.2% and 24.7%, respectively, while free cash flow rises from USD 779 million in FY26 to USD 910 million in FY27, USD 1.130 billion in FY28 and USD 1.313 billion in FY29. Barclays' positive view rests on secular SASE demand, Zscaler's first-mover and scale advantages, customer consolidation of security tools, and the combination of topline growth, margin expansion and free-cash-flow generation.

Analysis framework

Barclays frames the Investor Day around four linked questions: whether Zscaler reaffirms its ARR guide after the CRO transition; whether historical unit economics and peer benchmarks support a higher margin target; whether newer products and pricing models can broaden the platform; and whether those changes are sufficient to address competition and growth concerns. It then values the shares by applying a multiple to its FY28 free-cash-flow estimate and presents explicit upside and downside scenarios.

Methodology notes

• Valuation methods

  Free-cash-flow multiple valuation

  Barclays derives its USD 220 price target by applying an approximately 30x multiple to its FY28 free-cash-flow estimate of approximately USD 1.1 billion, and tests alternative free-cash-flow outcomes and multiples in upside and downside cases.

• Corporate Fundamentals and FinanceFree cash flow analysis

  Free cash flow and margin expansion

  The report connects operating leverage and a higher long-term EBIT-margin target to expanding free cash flow, which is both a core operating proof point and the basis of the valuation.

• Competition & strategyEconomic Moat and Competitive Advantage

  First-mover, scale and platform advantages

  Barclays assesses Zscaler's competitive position through its SASE leadership, scale, broader product platform and customer security-tool consolidation, while weighing competition from larger and private vendors.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Zscaler, Inc. (ZS)

  Primary covered company; Barclays expects Investor Day disclosures on guidance, margins, product diversification and pricing to influence sentiment and valuation.

  Strengths

  SASE leadership, first-mover and scale advantages, a growing platform story, customer security-tool consolidation, expected margin expansion and free-cash-flow growth.

  Weaknesses

  Investor perception that the company remains concentrated in ZIA/ZPA and uncertainty over the durability of its growth slope.

  Comparison

  Barclays compares prospective 25-30% long-term EBIT margins with CrowdStrike's 28-32% and Palo Alto Networks' low-to-mid-30% targets; ZS was down 11% year to date versus gains for PANW, CRWD, HACK and the S&P 500.

  Risks

  Competition in SASE, a smaller salesforce than incumbent vendors, and valuation-multiple compression.

• CrowdStrike Holdings, Inc. (CRWD)

  Comparable security vendor used as a long-term margin and performance reference.

  Strengths

  Targets 28-32% operating margins over the mid to long term.

  Comparison

  Used alongside Palo Alto Networks to benchmark Zscaler's prospective margin target.

• Palo Alto Networks (PANW)

  Comparable and competitor in cybersecurity and zero-trust/SASE discussions.

  Strengths

  Targets low-to-mid-30% operating margins over the mid to long term and has a larger incumbent salesforce and channel presence.

  Comparison

  Barclays compares its margin target and year-to-date share-price performance with Zscaler.

• Netskope (NTSK)

  Competitor cited in the zero-trust/SASE market.

  Comparison

  Named as a competitor to Zscaler; Barclays does not cover the company.

  Risks

  Competitive pressure on Zscaler's growth trajectory.

Key data

• FY27 ARR guidanceUSD 4,396-4,426 millionBarclays expects the company to reiterate this range at Investor Day.
• Long-term ARR aspirationUSD 10 billionBarclays views this as a 5+ year path, likely after FY30.
• Long-term EBIT-margin target expectation25-30%Barclays' expected updated target, versus the prior 20-22% target.
• Operating margin23.0% FY26; 23.7% FY27E; 24.2% FY28E; 24.7% FY29EFY26 actual and Barclays forecasts.
• FY28 free cash flowApproximately USD 1.1 billionUsed in the USD 220 price-target valuation.
• Price targetUSD 220Raised 10% from USD 200; based on approximately 30x FY28E free cash flow.
• Scenario valuesUSD 240 upside / USD 150 downsideUpside assumes FY28 FCF about 5% above estimate and about 31x; downside assumes FCF about 10% below estimate and about 21x.
• Revenue forecastUSD 3.353 billion FY26A; USD 3.923 billion FY27E; USD 4.491 billion FY28E; USD 5.084 billion FY29EBarclays forecast implies a 14.9% CAGR from FY26 to FY29.

Impact & implications

Barclays believes a higher margin target and clearer evidence of faster-growing products outside ZIA/ZPA could support consensus expectations, improve sentiment toward Zscaler's later-stage growth opportunities and justify a higher valuation multiple. However, it concludes that these developments alone may not resolve the core debate unless the company demonstrates a flatter, more durable growth trajectory despite competitive pressure.

Risks

• Competition from vendors building SASE solutions, including other security companies and private vendors, could impair Zscaler's growth trajectory.
• Incumbent network-security vendors have larger salesforces, stronger channel relationships and greater marketplace visibility, potentially limiting Zscaler's opportunities.
• Zscaler's premium valuation could compress if competitive or operating risks materialize.

What to watch

• Whether Zscaler reiterates FY27 ARR guidance of USD 4,396-4,426 million following the CRO transition.
• Any update on the path and timing toward the USD 10 billion ARR aspiration.
• Whether the company raises its long-term EBIT-margin target toward the 25-30% range.
• Evidence that Zero Trust Branch, Zero Trust Cloud, Data Security and Security for AI are increasing the contribution of products beyond ZIA/ZPA.
• Details on evolving device-, workload-, traffic-, volume- and token-based pricing models.
• Whether management provides evidence of faster and more durable growth sufficient to address competitive concerns.