Overview of the Downgrade#
Morgan Stanley has downgraded Zscaler (NASDAQ:ZS) from an Overweight to an Equalweight rating. The firm has also reduced its price target for the stock from $200 to $155. This change reflects concerns about Zscaler's growth potential and competitive landscape.
Growth Expectations and Challenges#
Last year, Morgan Stanley upgraded Zscaler based on the expectation that the company would expand its platform capabilities, particularly through the acquisition of Red Canary, which focuses on data security and digital experiences. While Zscaler has seen an 80% year-over-year increase in bookings for its ZDX platform, reaching $100 million in annual recurring revenue (ARR), the integration of Red Canary's capabilities into Zscaler's Zero Trust Exchange has not shown similar early success.
Focus on Key Products#
The downgrade has shifted attention to Zscaler's ZIA and ZPA products, which are currently growing in the mid-teens percentage range year-over-year. Morgan Stanley expressed concerns about sustaining growth rates above 20% once Red Canary's contributions become fully integrated in fiscal year 2027. Zscaler's stock has dropped over 35% this year, which is more significant than the average decline of around 24% for the cybersecurity sector.
Competitive Landscape and Market Dynamics#
Morgan Stanley noted that Zscaler remains a leader in the Zero Trust and Secure Service Edge categories, benefiting from the growing trend of Secure Access Service Edge (SASE). However, the firm highlighted that the competitive environment is becoming more intense as customers consider larger platform vendors with more extensive networking capabilities. This competition is particularly pronounced in large enterprise deals, where pricing pressures are increasing as the market matures.
Recent Performance and Mixed Outlook#
Despite the downgrade, Zscaler recently reported strong second-quarter fiscal 2026 results, exceeding expectations in revenue and earnings. The company has also raised its full-year guidance for key metrics. However, analysts from BTIG and KeyBanc have expressed caution regarding the SASE market's maturity and competitive pressures. While Cantor Fitzgerald noted positive feedback from partners, Evercore analysts pointed out that Zscaler, along with other cybersecurity stocks, is facing pressure from new competitive entrants like Anthropic’s Claude Mythos model, which could impact future performance.