Is Zscaler (ZS)’s Depressed Stock Opportunity Or Warning? Answer May Lie in Emerging AI Security Business
Abdul RahmanSat, September 12, 2026 at 2:40 PM GMT+3 3 min read
Cybersecurity company Zscaler, Inc. (NASDAQ:ZS) delivered solid results in the latest quarter. However, it is also evident that the market remains skeptical about the company's AI security opportunities.
Zscaler reported revenue and earnings that beat Wall Street expectations and issued upbeat guidance for both the current quarter and fiscal full-year. Yet Zscaler shares are down more than 20% year-to-date, bucking several cybersecurity stocks that have soared to new highs this year.
Zscaler's investment case rests on its AI security business becoming a meaningful growth contributor while the core business continues to power on.
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Zscaler's Core Business Remains Healthy
Zscaler, Inc. (NASDAQ:ZS)'s fiscal Q4 revenue jumped 25% YoY to $898 million, above the $877 million that analysts estimated. Annual recurring revenue rose 25% to $3.77 billion. The company's GAAP net loss narrowed to $3.4 million from $17.6 million a year ago. Adjusted EPS of $1.19 rose from $0.89 a year ago and topped the consensus estimate of $1.09.
Looking ahead, the company anticipates fiscal Q1 revenue in the range of $935 million to $939 million. Adjusted EPS was forecast in the range of $1.15 to $1.16. Both forecasts are above Wall Street expectations. Fiscal 2027 full-year revenue guidance of $3.91 billion to $3.94 billion also exceeds the $3.9 billion consensus.
These numbers indicate that Zscaler's core Zero Trust business is producing solid growth, although losses persist. The question is whether the company can add a second growth engine focused on AI security without fumbling execution and hurting the core business.
AI Security Is the Bigger Opportunity
As enterprises deploy AI agents, Zscaler, Inc. (NASDAQ:ZS) CEO Jay Chaudhry believes the Zero Trust architecture gives the company an important advantage. Zscaler's AI-security bookings over the past year hit $100 million and grew more than 50% sequentially in the latest quarter. Management expects its Zero Trust Exchange for Agents and Endpoint AI Security offerings to begin scaling in the second half of fiscal 2027, while Agentic SecOps is expected to start contributing in the second half of the year and build further momentum in fiscal 2028.
Accelerating AI-security bookings provide an early signal of demand. The investment thesis therefore depends on those bookings converting into recurring revenue and the AI security business becoming large enough to influence Zscaler's growth trajectory. The thesis breaks if those bookings fail to convert into recurring revenue, or if execution problems cause core growth to deteriorate.
Hedge Funds Are Becoming More Constructive
The latest hedge fund positioning suggests that institutional investors are willing to look beyond the near-term concerns. The number of hedge funds holding Zscaler, Inc. (NASDAQ:ZS) stock increased to 52 in Q2 from 46 in Q1. AQR Capital Management, the top hedge fund in Zscaler, increased its stake by 35% to 1.36 million shares. Jericho Capital opened a new position of 1.36 million shares, and Millennium Management increased its stake by 238% to 1.13 million shares.
Short positioning also became less aggressive. As of August 14, short interest stood at 6.23 million shares, or 4.65% of the public float. That was down 16.03% from the previous report.
Rising hedge fund ownership suggests that investors are becoming more constructive. The market, however, still wants proof. Zscaler's ability to turn AI security demand into ARR growth will determine whether its depressed share performance represents an opportunity or a warning.
While we acknowledge the potential of ZS as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.
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