Zscaler, Inc.ZS is preparing for higher capital expenditures as the rapid adoption of artificial intelligence (AI) creates new cybersecurity demands. The company needs to expand its infrastructure to handle increasing data volumes and secure AI workloads, but the added spending could pressure free cash flow in the near term.
Management previously indicated that fiscal 2026 capital expenditures could reach the high-single-digit percentage range of revenues, up from its earlier mid-single-digit forecast. CapEx could increase by another 200 basis points as a percentage of revenues in fiscal 2027. Higher costs for memory, storage and processors are expected to drive much of the increase. To manage these costs, Zscaler has been moving some fiscal 2027 equipment purchases into the fourth quarter of fiscal 2026 to secure current prices.
The bigger question is whether AI-driven demand can generate enough growth to justify the investment. So far, the signs are encouraging. Zscaler’s third-quarter fiscal 2026 revenues increased 25% year over year to $850.4 million, while annual recurring revenues also rose 25% to $3.53 billion. Its AI Protect solution generated more than $100 million in bookings over the past 12 months, showing that AI security is moving beyond an early-stage opportunity.
Zscaler also has enough financial strength to support higher spending. The company generated free cash flow of $136 million in the third quarter and $718.4 million in the first nine months of fiscal 2026. Free cash flow margin for the first three quarters of fiscal 2026 was 29%. However, rising capital expenditure is likely to hurt the company’s cash flow. During the last quarterly results, management lowered its fiscal 2026 free cash flow margin guidance range to 22.8%-23.3% from the earlier forecast of 26.5%-27%.
Higher CapEx creates a near-term financial headwind, but strong AI security demand could make the investment worthwhile if Zscaler converts infrastructure spending into sustained revenue growth. The Zacks Consensus Estimate for fiscal 2026 and 2027 indicates year-over-year revenue growth of 24.6% and 16.9%, respectively.
How Are ZS’ Rivals Investing to Capture AI Security Growth?
Palo Alto Networks, Inc.PANW and CrowdStrike Holdings, Inc.CRWD are taking a different approach to the AI security opportunity. Rather than relying heavily on physical infrastructure spending, both companies are directing more resources toward software, product development and acquisitions.
Palo Alto Networks has been expanding its AI and identity security capabilities through major acquisitions, including buyout deals for agentic security firm Portkey, endpoint specialist Koi Security, and major identity play CyberArk Software.
PANW has also been directing investment toward software integration, such as its Cortex XSIAM platform and Prisma AIRS AI Gateway. The company has also collaborated with AI infrastructure leaders like NVIDIA through which it is embedding security directly into AI infrastructure. This strategy allows Palo Alto Networks to pursue AI growth without relying primarily on higher traditional CapEx.
CrowdStrike is following a similar software-focused model. Its non-GAAP research & development spending jumped 25.3% year over year to $273.4 million in the first quarter of fiscal 2027.
The company has also strengthened its AI security portfolio through acquisitions, including SGNL in January 2026 and Pangea in September 2025. Pangea added AI detection and response capabilities to Falcon, helping CrowdStrike protect AI data, models, agents, identities and infrastructure.
ZS shares have plunged 16.7% year to date, while the Zacks Security industry surged 85%.
Zscaler YTD Price Return Performance
Image Source: Zacks Investment Research
From a valuation standpoint, ZS trades at a forward price-to-sales ratio of 7.77, significantly below the industry’s average of 18.85.
Zscaler Forward 12-Month P/S Ratio
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Zscaler’s fiscal 2026 and 2027 earnings implies a year-over-year increase of 26.2% and 10.7%, respectively. Estimates for fiscal 2026 have remained unchanged over the past 60 days, while fiscal 2027 estimates have been revised upward in the past 30 days.
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