Following CrowdStrike and Palo Alto, the era of AI inference sees another cybersecurity winner! Zscaler (ZS.US) competes in the trillion-dollar market with a 75% surge in its sales pipeline.

The stock price of Zscaler (ZS.US), a leader in U.S. cybersecurity technology, surged over 11% in after-hours trading on Thursday, following the release of a robust earnings report that exceeded market expectations and provided an optimistic outlook for the future. This highlights a shift in cybersecurity budgets from optional spending to prerequisites for deploying AI technologies, as the demand for cybersecurity products is bolstered by a significant expansion driven by the AI reasoning market. Following the transition to highly scalable AI agent workflows, cybersecurity demand is likely to see a structural increment that far exceeds traditional IT spending, rather than just accelerated growth aligned with advances in cutting-edge AI technologies. In the fourth quarter, Zscaler reported a revenue of $898.2 million, a 25% year-on-year increase, surpassing the market expectation of $877 million. The adjusted earnings per share (EPS) were $1.19, beating the anticipated $1.09, and the annual recurring revenue (ARR) grew by 25% to $3.771 billion. More importantly, the bookings for "Security for AI" increased more than 50% quarter-over-quarter, and the sales pipeline grew by 75%. The former reflects secured commercial orders, while the latter indicates a strong reserve of future orders, driven by increased frequency in model calls, applications, and tools, leading to heightened demand for zero-trust access, identity governance, and data leak prevention. Zscaler's management expects Q1 revenue for fiscal year 2027 to be between $935 million and $939 million, higher than the market projection of $927 million, with adjusted EPS forecasted to be between $1.15 and $1.16, surpassing the expected $1.08. The full fiscal year revenue guidance is set at $3.908 billion to $3.938 billion, slightly above the expected $3.9 billion, while adjusted EPS is projected between $4.86 and $4.90, significantly exceeding the expected $4.60. However, ARR is expected to grow only by 16.6% to 17.4%, a noticeable slowdown compared to the 25% growth in fiscal year 2026. After the earnings report and future outlook were released, Zscaler's stock initially rose over 11% in after-hours trading but later experienced a slight 1% decline. Prior to this, the stock had dropped approximately 20% year-to-date. This recent strong rebound is essentially a market re-evaluation of Zscaler's significant growth potential in the AI reasoning era and its enhanced monetization capacity, rather than an indication that valuation risks and sustainable growth risks have entirely vanished. The performance of competitors in the cybersecurity industry further confirms the strength of demand. CrowdStrike reported Q2 revenue of $1.47 billion, a year-on-year increase of 26%, with ARR growing by 25% to $5.84 billion and a record net new ARR addition of $333 million, up 51% year-on-year. Free cash flow reached $377 million, and the stock surged approximately 10.4% in after-hours trading post-earnings release. Another cybersecurity giant, Palo Alto Networks, posted Q4 revenue of $3.41 billion, a 34% increase year-on-year, exceeding expectations of $3.35 billion, with adjusted EPS of $1.02, higher than the anticipated $0.98. Their next-generation security ARR grew 63% to $9.1 billion, and the revenue guidance for fiscal year 2027 is estimated at $14.1 billion to $14.2 billion, surpassing the market expectation of $13.79 billion. Both CrowdStrike and Palo Alto Networks have recorded year-to-date increases exceeding 80%, creating a stark contrast to Zscalers previous underperformance. The underlying logic is undoubtedly that AI reasoning, particularly in the context of agentic AI, is now characterized by fully autonomous workflows that continually utilize models, APIs, databases, and enterprise tools, accessing sensitive data and executing commands at machine speeds. This introduces new risks such as machine identity, privilege escalation, prompt injection, data leakage, lateral movement of agents, supply chain contamination of models, and autonomous attacks, necessitating a shift in security architecture from traditional perimeter defenses to continuous identity verification, least privilege access, inline traffic inspection, and runtime governance. While the demand for training compute may exhibit project-based volatility, each instance of reasoning, tool usage, and data access by agents requires security controls and AI security tools, ensuring that cybersecurity product line revenues establish continuous growth in tandem with the increase in AI utilization. Palo Alto Networks' management elaborated during the Q&A session on a scenario considering a $5 trillion AI capital spending over the next five years, while highlighting a global cybersecurity technology debt of approximately $1 trillion that urgently needs modernization. Palo Alto CEO Nikesh Arora stated during the conference call that recent advancements in the AI field are propelling cybersecurity to the top of CIOs' priority lists, representing a lasting tailwind. He emphasized that about $1 trillion of global cybersecurity infrastructure is ill-prepared to address AI threats, creating a substantial long-term growth opportunity for the industry. What exactly is Zscaler? How does its core business compare to cybersecurity giants CrowdStrike and Palo Alto Networks? Zscaler is a high-purity target for zero trust and the growth of AI agent traffic, demonstrating significant resilience but also a greater dependency on sales execution and new ARR realization. CrowdStrike benefits from its vast endpoint behavioral telemetry and automated security operations, directly gaining from AI-driven attack detection demand. Palo Alto Networks possesses the most complete product line and strongest cross-selling capability, making it best positioned to ride the trend of enterprises reducing their number of vendors through platform-based integration. In other words, Zscaler is betting on removing network trust, CrowdStrike is focused on discovering and terminating attacks, while Palo Alto is investing in integrating the entire security system on one platform. Zscaler is a cloud-native zero trust cybersecurity company, with its Zero Trust Exchange situated in the path of enterprise traffic, connecting users, workloads, branch offices, or AI agents to authorized applications without directly accessing the internal network. The companys core business includes secure service edge, secure access service edge (SASE), internet access security, private application zero trust access, data leak prevention, cloud workload and branch security, and digital experience monitoring, while expanding into AI agent communication, model access control, and agent security operations (Agentic SecOps). Zscaler serves as the traffic and access control layer, replacing traditional VPNs, network perimeters, and certain security appliances with cloud-based inline proxies; CrowdStrike represents the endpoint telemetry and detection response layer, built upon the Falcon platform and endpoint agents, focusing on endpoint detection and response (EDR), extended detection and response (XDR), cloud workloads, identity protection, threat intelligence, and next-generation security information and event management (Next-Gen SIEM), excelling in identifying what attacks are happening on devices and workloads and swiftly terminating them; Palo Alto Networks is the most comprehensive full-stack security platform, originating from next-generation firewalls (NGFW) and currently spanning across network and SASE, Prisma cloud security, Cortex security operations, and identity security, incorporating hardware, software subscriptions, and cloud platforms. As AI risks transform into urgent security needs, Zscaler delivers results that surpass expectations by focusing on zero trust. With the rise in cybersecurity risks during the AI reasoning era, there is an urgent demand for cybersecurity tools among businesses. Zscalers fourth-quarter performance and future outlook exceeded Wall Street analysts' expectations, which is why the stock soared significantly in after-hours trading on Thursday. The company posted revenue of $898.2 million for the fourth quarter, a 25% year-on-year increase, surpassing the market expectation of $877 million, and its adjusted EPS was $1.19, exceeding the projected $1.09. Zscaler reported a GAAP net loss of $3.4 million, or a GAAP EPS loss of $0.02; a year ago, the net loss stood at $17.6 million, or $0.11 per share. For the full fiscal year 2026, Zscalers revenue was $3.353 billion, also a 25% year-on-year increase; excluding Red Canary, revenue was $3.209 billion, a 20% growth. Non-GAAP operating profit rose to $767.1 million, and the operating margin increased from about 21.7% the previous year to 22.9%; non-GAAP EPS increased from $3.28 to $4.21. Operating cash flow for the year was $1.130 billion, higher than last year's $972.5 million; free cash flow grew to $779.1 million, but the free cash flow margin dropped from 27% to 23%. In the fourth quarter, free cash flow declined from $171.9 million a year earlier to $60.8 million, primarily due to capital expenditure and investments in internal software rising from $78.7 million to $218.5 million, making profitability quality and capital investment crucial variables for valuation assessment. During the earnings call, management disclosed that net new ARR reached $246 million, a 24% year-on-year increase; excluding Red Canary, it was $232 million, up 17%. Remaining performance obligations (RPO) grew by 27% to $7.365 billion, and Z-Flex contracts for the fourth quarter totaled over $770 million, increasing by more than 60% quarter-over-quarter, with over $1.7 billion for the full year. The companys management indicated that 70% of AI security deals included data security products, and the number of Zero Trust Everywhere enterprise clients increased from over 700 the previous quarter to over 950, with non-seat-based products contributing about 30% of the new and add-on sales annual contract value. For the first fiscal quarter, the company projects revenue between $935 million and $939 million and adjusted EPS between $1.15 and $1.16, both exceeding the market consensus of $927 million revenue and $1.08 adjusted EPS. Simultaneously, the company plans to restructure approximately 3% of its workforce and set aside expenses of $30 million to $33 million; management expects fiscal year 2027 revenue to be between $3.908 billion and $3.938 billion, higher than the market consensus. ARR is projected to be $4.396 billion to $4.426 billion, with growth slowing from the 25% in fiscal year 2026 to about 17%, so whether the stock can maintain its re-evaluation will depend on the conversion of the AI security pipeline into new ARR to offset the adjustments in the sales organization and the higher attrition rate at Red Canary. While the cybersecurity sector is strengthening, stock prices have diverged; Zscaler is betting on the re-evaluation of cybersecurity in the era of AI agents. Whether closed-source or open-source models ultimately dominate, cybersecurity remains one of the most model route-neutral beneficiaries: closed-source models need to address risks associated with third-party interfaces, data boundaries, and vendor concentration; open-source and open-weight models introduce risks related to model origins, dependency components, self-hosted environments, and patch fragmentation. In other words, the more iterations and greater autonomy of agents, the more identities, endpoints, APIs, cloud workloads, data, and runtime that enterprises need to safeguard. Palo Alto CEO Nikesh Arora highlighted nearly $1 trillion in global cybersecurity debt during this weeks earnings call, which essentially reflects the potential upgrade cycles required for a significant volume of architectures established before the AI era. The companys CEO, Jay Chaudhry, emphasized that the proliferation of its zero trust cloud security architecture and innovative technologies is the primary driving force for exceeding quarterly performance expectations. In an interview during the earnings call with American consumer news and business channel, he expressed great optimism about the new generation of zero trust products aimed at AI agents recently launched by the company. This product is showing early signs of growth, which is expected to accelerate rapidly in fiscal years 2028 and 2029. This presents a longer-term opportunity, but I believe it is an attractively significant opportunity with substantial barriers to entry, Chaudhry stated. The annual recurring revenue data grew by 25% year-on-year to $3.77 billion, slightly surpassing the market consensus of approximately $3.75 billion. As increasingly complex models of cyberattacks arise and agent-led attacks become prevalent, enterprises are forced to adopt new security tools, resulting in a substantial surge in cybersecurity stocks this year. Despite competitors hitting new highs this year with gains exceeding 80%, Zscaler's stock has plummeted by 20%. Last quarter, following the departure of two sales executives, management adopted a cautious strategy for performance guidance, leading to the stock posting its worst single-day performance ever. However, Chaudhry indicated that the market has not grasped the key aspects of Zscalers differentiated strategy. The core capabilities we bring are quite unique; as AI agents become more prevalent, the market will increasingly recognize Zscaler as a critical participant, he remarked. Like other cybersecurity industry executives, Chaudhry views AI security as one of the most significant opportunities. Over the past year, the total booking for this business reached $100 million and increased by more than 50% quarter-over-quarter in this current quarter.