Why Zscaler’s 27% Crash Is the Ultimate Test for Software Investors

December 5th, 2025 by Trefis Team
ZS: Zscaler logo
ZS
Zscaler

There is an old saying on Wall Street: “When good news makes a stock go down, the party is over.”

This week, Zscaler (ZS) tested that theory in the most brutal way possible. On Tuesday, the cybersecurity giant reported a “Beat and Raise” quarter—revenue grew 26%, earnings beat estimates, and they raised full-year guidance.

The reward? A roughly 17% crash in the stock since the earnings release in late November.

It has been a trending topic on many trading desks of late. The bulls are screaming “Generational Buying Opportunity.”  The bears are screaming “Valuation Trap.”

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Who is right? Could this be a Regime Change in how Wall Street values software?

Image by Mohamed Hassan from Pixabay

The Thematic Anchor: The “Perfection” Regime

For years, software stocks were graded on a curve. As long as you grew 30%, nobody cared about the details. Zscaler’s crash signals that the rules may be changing. We are now in the “Perfection Regime.”

  • The Trigger: Zscaler beat revenue, but Calculated Billings (a proxy for future cash flow) came in light, and the CFO announced retirement.
  • The Signal: In 2021, a CFO retirement was a footnote. In 2025, it’s a sell signal. Investors are terrified of any “uncertainty” in high-multiple stocks. The market is effectively saying: “If you want a 12x Sales multiple, you must be flawless.”

The Valuation Sanity Test: Is it Actually Cheap?

After a 27% haircut, Zscaler looks “optically” cheap. But is it?

  • Zscaler P/S: 12x Sales
  • Palo Alto Networks P/S: 13x Sales
  • CrowdStrike P/S: 27x Sales

The Distortion: Even after the crash, Zscaler trades at roughly the same multiple as Palo Alto Networks, a company that is far more profitable and stable

  • The “Implied Growth” Check: To justify 12x Sales, Zscaler must grow at 20%+ for another 5 years.
  • The Risk: If growth decelerates to 15% (the “Maturity Phase”), the stock re-rates to 8x Sales (like Check Point or Fortinet). That implies another 35% downside. The “dip” isn’t a floor; it’s just a lower ledge.

The Black Box: The “Proxy” Moat

Why buy Zscaler at all? Why not just use Palo Alto?

  • The Asset: The Zero Trust Exchange.
  • The Architecture: Zscaler uses a “Proxy” architecture. They sit between you and the internet. They inspect traffic, then let it pass.
  • The Competitor: Palo Alto Networks uses a “Firewall” architecture. They let traffic pass, then inspect it.
  • The Moat: The “Proxy” approach is structurally more secure for the AI era because it prevents “lateral movement” (hackers jumping from app to app).
    • The Sticky Factor: Once a company routes all its traffic through Zscaler’s proxy, turning it off is a nightmare. It is digital heroin. This structural lock-in is why the bulls are right about the long term—the product is superior.

The Catalyst: The CFO “Tell”

This is the red flag you cannot ignore.

  • The Event: CFO Remo Canessa is now retiring – a decision he announced back in December 2024, contingent on Zscaler finding a successor.
  • The History: Canessa is a legend. He guided the company through its IPO and hyper-growth phase.
  • The “Whisper”: When a legendary CFO leaves as growth is decelerating (from 40% levels in 2023 to 26%), it could be a soft signal that the “Easy Growth” era is over. He could potentially be taking some chips off the table after a long hyper-growth run. It suggests the next phase may be “Grinding Efficiency,” not “Rocketship Growth.”

Our Take

Zscaler is a Category King going through a Mid-Life Crisis. The technology (Zero Trust) is inevitable. The customer base is locked in.

  • Bull Case: The billings miss was a one-off timing issue, and the stock potentially bounces back to $300 as AI security spending ramps up next quarter.
  • Bear Case: The CFO exit signals a structural slowdown to <20% growth, and the market punishes it until it hits a “Utility Multiple” of about 9x Sales (about $180/share).

Don’t catch the knife today. The market is punishing “Imperfection.” Wait for the dust to settle. If it hits $200 (approaching 10x sales), you back the truck up. Until then, let the falling knife hit the floor.

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Individual picks can be volatile but staying invested is what matters. A diversified portfolio helps you stay the course, capture upside and reduce downside.

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