Zscaler‘s (ZS -3.37%) stock price sank 19% on Sept. 4 after its latest earnings report came out. For the fourth quarter of fiscal 2024, which ended on July 31, the cybersecurity company’s revenue rose 30% year over year to $593 million and exceeded analysts’ expectations by $25 million. Its adjusted earnings per share (EPS) grew 38% to $0.88 and cleared the consensus forecast by $0.19.

Those headline numbers seemed healthy, but its guidance didn’t impress the bulls. Let’s see if this out-of-favor hypergrowth stock is still worth buying after declining nearly 30% this year.

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Zscaler’s hypergrowth days are ending

Zscaler develops “zero trust” services, which treat everyone, including a company’s top executives, as a potential threat. It only provides its tools as cloud-native services, which don’t require any on-site appliances. That lightweight approach is usually cheaper, stickier, and easier to scale than appliance-powered services as an organization expands.

Zscaler went public in 2018. From fiscal 2019 to fiscal 2024, revenue grew at a compound annual rate of 48%. That growth was driven by the rapid expansion of the zero trust and cloud-native cybersecurity markets. But over the past year, its growth in calculated billings and total revenue cooled off.

Data source: Zscaler. YOY = Year over year.

Zscaler’s revenue rose 34% in fiscal 2024, but it only expects 20% to 21% growth in fiscal 2025. That would represent its slowest annual revenue growth rate since its initial public offering (IPO). It mainly attributed that slowdown to the macro headwinds, which are driving more companies to scrutinize their software spending.

But it could also be facing tougher competition from bigger and more diversified cybersecurity companies like CrowdStrike (NASDAQ: CRWD) and Palo Alto Networks (NASDAQ: PANW), which are both integrating similar zero trust tools into their endpoint security platforms. From fiscal 2024 to fiscal 2026, analysts expect Zscaler’s revenue to grow at a compound annual rate of 21%.

It’s ramping up its spending as its growth cools off

Zscaler has stayed unprofitable on a generally accepted accounting principles (GAAP) basis ever since its IPO. But in fiscal 2024, its non-GAAP operating margin expanded 5 percentage points to 20% as its non-GAAP EPS increased 78%.

However, it expects its non-GAAP EPS to decline 10% to 12% in fiscal 2025 as it expands its sales and marketing teams to pursue new customers. Analysts had previously anticipated 4% growth.

That steeper-than-expected decline rattled the bulls because it coincided with its slowing revenue growth and suggested it was losing its pricing power. It also implies Zscaler is saturating its zero-trust niche and might need to aggressively expand its ecosystem with additional cybersecurity services to keep growing. But doing so could crush its margins by pitting the company against bigger companies like CrowdStrike and Palo Alto.

Pay attention to its debt and dilution

Zscaler had a high debt-to-equity ratio of 2.7 at the end of fiscal 2024. That’s roughly triple its debt-to-equity ratio of 0.9 at the end of fiscal 2018. It also increased its share count by 24% over the past six years.

Even after its latest post-earnings decline, Zscaler doesn’t look cheap at 57 times this year’s adjusted earnings. CrowdStrike, which is still growing faster even after triggering a disastrous IT outage in July, trades at 70 times forward earnings. Palo Alto, which is growing slower than both companies, has a lower forward multiple of 54. Unlike Zscaler, both CrowdStrike and Palo Alto are firmly profitable by GAAP measures.

Is it the right time to buy Zscaler?

Zscaler’s cooling revenue growth, rising expenses, high leverage, ongoing dilution, and premium valuation all make it a tough stock to recommend. Its insiders also sold more than 6 times as many shares as they bought over the past 12 months.

Zscaler is still growing, but it will face tougher macro and competitive challenges over the next few years. That’s why I wouldn’t touch its stock until its earnings growth stabilizes and its valuations cool off to more sustainable levels.