Zscaler (ZS)

The value today by multiples ($139) is below the market price ($226). The present-value lens does not apply to this company, so the contrast between methods is unavailable.

Today — expensive, no margin of safety: at $226 trades ~62.6% above its value discounted to today (~$139); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$86.

Educational / informational. Does not constitute investment advice.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on FCF maintenance. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Zscaler is a subscription cybersecurity platform with very high share-based compensation (US$821.9 million in fiscal 2026, 24.5% of revenue) and still-negative accounting operating profit (−4.0%), which is why the valuation metric is maintenance free cash flow net of share-based compensation: operating cash flow margin net of that compensation times revenue, less maintenance capital expenditure, which here is total capital expenditure (maintPct 1.0) because infrastructure investment grows in line with revenue and there is no separate discretionary expansion program. Year 0 = fiscal 2026, ended July 31, 2026 and incorporated from the 10-K and the earnings 8-K of September 3, 2026. Because the fiscal close coincides with the grid's year 0, the +1y window is exactly fiscal 2027 and the guidance no longer needs approximating: the three scenarios anchor in the guided revenue range (adverse US$3,908 million, base the US$3,923 million midpoint, favorable US$3,938 million), that is +16.6% to +17.5%, well below the +25.4% of the trailing window. From there each path decays at its own speed to terminals of ~5%, ~8.5% and ~11% by year 5. Capital expenditure is redefined in this pass and the change is declared: it becomes the figure the company itself deducts to compute its free cash flow, that is property and equipment plus capitalized internal-use software, or US$350.9 million in fiscal 2026 —10.5% of revenue— against the US$277 million captured by the property and equipment concept on its own. It is the definition the company guides on —free cash flow of 23.0% to 23.5% of revenue for fiscal 2027— and it is also the one that charges the full investment, as the method requires. On that basis year-0 maintenance cash flow comes to −US$43 million: share-based compensation absorbs all of operating cash flow before capital expenditure. That is why the valuation runs on the year-5 metric and the present-value lens is declared not applicable. The assumption the whole result hangs on is the share-based compensation path, which falls from 24.5% of revenue to ~15% over five years as revenue scales over a grant base that grows more slowly; the adverse scenario is exactly the one in which that compression does not happen and the margin net of compensation stays at 15% by year 5 instead of reaching 23%. The fiscal year-end balance sheet: cash and short-term investments of US$3,474 million against convertible notes of US$1,696 million, that is positive net cash of US$1,778 million — the previous model counted only the US$982 million of cash and equivalents and left out the US$2,546 million of short-term investments. The notes are subtracted in full as debt, so their conversion shares do not enter the denominator and the count is the quarter's accounting diluted figure (161.9 million), not the ~170 million fully diluted shares the company uses for its adjusted earnings guidance. With no dividend and no buyback, the surplus accumulates in full. The tax rate is the 21% non-GAAP rate the company itself adopted following the enactment of the tax law, reduced from the previous 23%. The exit multiple stays within the quality software band: base 25x, adverse 20x and favorable 29x on year-5 maintenance cash flow.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $173 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $226, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $173 in 5 years and a required return of 4.5% annually, the maximum to pay today is $139. Against the current market price ($226), the margin of safety is -62.6% (trades above the maximum → a premium is paid) and the total return at that price would be -5.2% annually.

• Valuation metric. Valued on a multiple applied to maintenance free cash flow net of share-based compensation, not on reported cash flow or on accounting profit (negative).
• Expected return. Overvalued with an expected return of -5% annually over five years at market price.
• Margin of safety. No margin of safety: the price already discounts a demanding scenario.; the price already reflects much of the adjustment for the deceleration and capex guided in May 2026.
• Exit multiple. 25x on year 5 maintenance free cash flow, within the 20x-30x band of the enterprise software archetype.
• Sensitivity to the adverse scenario. In the adverse scenario, maintenance free cash flow is negative in years 1-2 due to the capex increase, sharply compressing the three-year value.
• Contrast with the historical high. The stock's decline reflects an identifiable catalyst (the guidance cut), not a sell-off with no apparent cause.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✕ CFROIC backs up the ROIC (0%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Operating cash flow of $1,101 million over the trailing twelve months, but maintenance free cash flow net of stock-based compensation is just $180 million.
• Return on capital. Return on invested capital is currently below the 10% bar, reflecting still-negative GAAP operating income.
• Revenue predictability. Deferred revenue of $2,477 million and multi-year contracts give visibility into much of future revenue.
• Earnings quality. The gap between non-GAAP operating income (a record 23% in the third quarter) and GAAP (-3% in the same quarter) is almost entirely stock-based compensation, not accruals.
• Reinvestment runway. The zero trust security market keeps penetrating enterprise budgets; expansion into artificial intelligence security is an additional runway.
• Capex sensitivity. The guided capex increase to high single digits of revenue is the variable that most moves maintenance free cash flow in the short term.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Zscaler is a subscription business with upfront billing, so deferred revenue is the best leading indicator of the health of the contracted business. Stock-based compensation and capex are the two variables that most move maintenance free cash flow in the short term: the first because it is the metric that must be expensed to avoid overstating owner free cash flow, and the second because the company itself guided in May 2026 a jump to 'high single digits' of revenue that compresses the free cash flow margin by nearly 400 basis points versus prior guidance. The customer count grows more slowly than revenue because the main growth engine is expansion within the installed base (86% of FY2025's revenue increase), not new logo acquisition.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Current growth. Trailing-twelve-month revenue growing 24.6% year over year, with ARR of $3,525 million growing 25%.
• Guided deceleration. The company itself guided growth of 16-17% for fiscal year 2027, a jump of 8-9 points versus the current pace.
• Expansion engine. 86% of fiscal year 2025's revenue increase came from existing customers; the dollar-based net retention rate is 114%.
• New customers. The customer base grew 9% in fiscal year 2025 (from 8,650 to more than 9,400), a slower pace than revenue growth.
• Complementary acquisitions. Red Canary contributed $127 million of ARR in the third quarter of fiscal year 2026; Symmetry Systems has been announced but not closed.
• Penetration ceiling. The network security market is still transitioning away from perimeter architectures; zero trust penetration of enterprise security spending is still low.

• Revenue recurrence. 100% subscription-based, with one- to three-year contracts billed in advance and recognized ratably.
• Product differentiation. Integrated platform that replaces multiple point solutions (proxy, firewall, CASB, data loss prevention) under a single zero trust architecture.
• Direction of the moat. Patent and certification portfolio expanding each year; the departure of two sales leaders is a recent signal of commercial friction to watch.
• Competitive position. More than 45% of the Fortune 500 and ~40% of the Forbes Global 2000 are customers; no single customer exceeds 10% of revenue.
• Operating leverage. The non-GAAP operating margin reached a record 23% in the third quarter of fiscal year 2026, showing real scale even with negative GAAP income.
• Behavior in technology spending cycles. Security is usually a non-discretionary budget item, but longer sales cycles in a technology budget downturn are a risk disclosed by the company itself.
• Channel concentration. The top five channel partners represented 28% of fiscal year 2025 revenue, with generally non-exclusive agreements.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $1.8 bn
• ✕Interest coverage (EBIT / interest)EBIT ≤ 0 vs interest $0 bn
• –Liquidity (current ratio)no data
• –Cash quality (CFROIC vs ROIC)ROIC ≤ 0 (see value creation)
• ✕Value creation (ROIC − 10% bar)-23pp
• !Malinvestment test (capex vs incremental ROIC)Capex/D&A 2.4x
• !Float / working capitalConsumes cash $0.1 bn (positive WC)
• ✕Dilution (SBC % of revenue + shares)SBC 24.5% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Cash position. $982 million in cash, against $1,700 million in senior convertible notes.
• Debt structure. Debt is entirely convertible notes with no meaningful near-term maturities; interest expense is marginal relative to revenue.
• Operating liquidity. Positive and growing operating cash flow ($1,101 million over the trailing twelve months) funds operations without needing additional debt.
• Working capital. Deferred revenue ($2,477 million) funds much of working capital, a typical and healthy trait of the upfront-billing subscription model.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Founder-led. Jay Chaudhry founded the company in 2007 and leads it as executive chairman and board chair, with a meaningful economic stake.
• Capital allocation. No dividends or active buyback; excess cash is reinvested into the business and into complementary acquisitions such as Red Canary.
• Stock-based compensation. 24.7% of trailing-twelve-month revenue; a high level that dilutes shareholders if it does not decline with scale.
• Transparency in communication. The earnings release details the non-GAAP reconciliation and clearly explains the tax rate change and the impact of the capex increase on guidance.
• Acquisition integration. Red Canary and the announced Symmetry Systems acquisition expand the product; the integration does not yet have an extensive track record.

• The May 2026 guidance reset hit short-term sentiment on a business that keeps growing with record non-GAAP profitability (23% non-GAAP operating margin in the third quarter).
• The market punished the guided deceleration toward fiscal year 2027 and the capex increase all at once, without distinguishing how much of that increase is one-time (infrastructure buildout) versus structural.
• The departure of two sales leaders generated additional noise about commercial execution, on top of the guidance adjustment.
• The guided capex increase was read as deterioration of the business rather than as investment in infrastructure to sustain future growth.

After the 45% decline, much of the adjustment for the guided deceleration and capex increase is already priced in. At current multiples, Overvalued and No margin of safety: the price already discounts a demanding scenario.: there is no discount as clear as to speak of missing buyers or a forced sale beyond the expectations reset itself produced by the May 2026 earnings release.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -25%/year (-76% total): the margin of safety protects the downside. The bull (+5%/year, +31% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Persistent GAAP losses. Accumulated deficit of $1,249.4 million with no certainty as to when sustained GAAP profitability arrives.
• Intense competition. Legacy security vendors and large networking providers can compete at zero or negative margins to win accounts.
• Contract cancellation. The new European data law allows customers to cancel with 30-60 days' notice, even under multi-year contracts in force.
• Channel concentration. The top five channel partners represent 28% of revenue, with non-exclusive agreements.
• Founder dependence. Jay Chaudhry is critical to strategic direction, with no key-man insurance.
• Capex increase. Capex guided to high single digits of revenue compresses the free cash flow margin by nearly 400 basis points.
• Elevated stock-based compensation. 24.7% of revenue and 81.3% of free cash flow; if it does not decline with scale, it dilutes the shareholder's real return.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC -13% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower, growing 12% — no conclusive multiple/growth to judge the price.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  ROIC -13%; earnings yield not computable (EBIT or EV not positive).

• Howard Marks Perception vs reality + cycle

  The price discounts 150% vs our 12%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -25%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, network effects, efficient scale, intangibles → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 150% growth, far above our 12% — heroic assumptions.