Z scaler I will report after closing. I’m long on the stock and it seems to be in the middle of a bearish-to-bullish reversal, but the premium (options) is not long.
With an implied move of 12.2% versus the long-term average of 11.3%, options are not cheap.
I would like to see a effectively flat premium with bullish tilt/sentiment (aka “delta”). Call spread risk reversal, where you sell an out-of-the-money put and use the proceeds to buy a call spread, provides long-term exposure with little or no premium outlay, but is slightly less risky than buying out the stock if returns are poor. Selling a downside put ties up cash, but it’s similar to simply buying the stock.
Revenue is up 26% year-over-year, with trailing 12-month revenue expected to reach $3.32 billion, and free cash flow margins hovering around 27%. With NTM free cash flow of around $1 billion and FCF expected to grow nearly 24% year over year, this could be a money compounding machine, and $1.7 billion in net cash means there aren’t any landmines lurking on the balance sheet. The Zero Trust Exchange platform is the cornerstone of AI security, and it’s not a marketing language, it’s an architecture. When all enterprise AI agents require a secure and inspectable path to cloud resources, Zscaler’s inline proxy model is structured in a way that traditional firewall vendors simply cannot replicate. Palo Alto and Fortinet are bringing on-premises thinking to cloud-native issues. ZS was born in the cloud. This is one of the reasons why ZS is a SaaS business that can thrive in the world of AI.
Exposure to AI agents has led to underestimation. Every new AI workload (copilot, autonomous agent, LLM API call) is a new traffic stream that must be inspected, protected, and managed by policy. Zscaler’s AI guardrails for public and private apps are built specifically to address emerging risks posed by AI models and applications, along with a growing AI security portfolio.
All of these suggest that there is no business risk. As a company’s budget cycles tighten, net retention rates are likely to slow. Hyperscalar competition, macro headwinds, and unmonetized AI capabilities. Although GAAP losses have narrowed, it has given momentum to critics who say profitability continues to be an afterthought. This is an important quarter as public expectations are on reported profits. Some of the good news may have already been priced in, as the stock has already recovered significantly from its lows based on this expectation.
Bottom line: The fundamentals are deteriorating, the AI security thesis is accelerating in reality, the balance sheet is clean, and the market is already telling me fear is pretty expensive.
I take on the other side of that fear all day long.
