Zscaler's Growth Slows as Capex Pressures Margins

Zscaler reported fiscal fourth-quarter revenue of $898.2 million, a 25% year-over-year increase, with total annual recurring revenue reaching $3.8 billion. While net new ARR excluding the Red Canary acquisition accelerated to 17% in the quarter, management guided for a significant deceleration in fiscal 2027, pointing to sales leadership transitions and product uptake issues.

The company's valuation has adjusted to reflect these slowing growth expectations, with the next twelve months price-to-earnings multiple dropping to approximately 40x from a four-year average near 64x. This multiple compression occurs despite a record operating margin, as investors weigh the sustainability of billings against rising capital expenditure pressures.

Billings Data Reveals Cooling Demand

Deferred revenue growth has decelerated annually since fiscal 2022, falling from 62% to 18.5% in fiscal 2026. This rate is now lower than the company's 25% revenue growth, marking the first instance where billings have lagged recognized revenue. The trend suggests underlying demand was cooling before management issued its conservative guidance.

Non-current deferred revenue, which tracks multiyear commitments, grew only 7.7% in fiscal 2026 after a 65% increase the prior year. This discrepancy persists despite $1.7 billion in Z-Flex bookings, likely because these contracts are billed annually rather than upfront, complicating the verification of long-term commitment growth through standard financial lines.

Rising Infrastructure Costs Squeeze Cash Flow

Free cash flow margin declined by nearly 500 basis points to 25.4% in fiscal 2026, despite non-GAAP operating margin rising to 22.9%. The primary driver was capital expenditure, which reached 8% of revenue as the company accelerated data center equipment purchases to secure supply amid component shortages.

CFO Kevin Rubin cited rising prices for memory, storage, and processors as key factors in the increased spending. The company expects capex to remain elevated in fiscal 2027, which will continue to pressure free cash flow growth relative to revenue expansion, according to the report from GN markets/earnings (en-US).

Valuation Reflects Slower Growth Outlook

Zscaler's multiple has compressed from highs above 100x to about 40x, pricing in the expected slowdown in net new ARR growth to the high single digits. This adjustment aligns the stock with its recent billings trends and capital intensity, removing much of the premium for hyper-growth expectations.

The shift in valuation reflects a market reassessment of the company's operational leverage. With growth rates normalizing and infrastructure costs rising, investors are prioritizing cash flow sustainability over top-line expansion, resulting in a more grounded multiple that accounts for the structural changes in the business.