Bernstein Raises Zscaler to $298, Downgrades Palo Alto Networks

Bernstein raised its price target on Zscaler, Inc. (NASDAQ:ZS) to $298 on September 17 while downgrading Palo Alto Networks, Inc. (NASDAQ:PANW) and several other cybersecurity names to Market Perform. The Zscaler target implied roughly 46% upside when the call was published, and Bernstein kept an Outperform rating on the stock.

The move draws a line inside one of 2026's most popular trades. Wall Street has spent much of the year rewarding cybersecurity stocks for the risks created by AI. Bernstein analyst Peter Weed now thinks the easy part of that trade is over — with one major exception.

The distinction is valuation, not a belief that AI security demand disappears.

Zscaler has to prove its underperformance created an opportunity

Zscaler entered the analyst call down about 11.5% in 2026 while many peers had rallied. Bernstein argued that the company's shift from opportunity-based selling toward deeper customer relationships is beginning to work. Zscaler reported a 115% dollar-based net retention rate in fiscal Q1, and management later said that level had remained fairly stable for several quarters.

That creates a straightforward rerating case. If existing customers adopt more products while AI increases the number of users, agents and workloads requiring security, growth can remain strong without the stock carrying the same expectations as hotter peers.

The discount exists for a reason. Zscaler still faces slower incremental ARR growth and aggressive competition from companies bundling multiple security functions. If large enterprises prefer consolidation, a focused zero-trust specialist must keep proving it deserves separate budget.

Palo Alto's problem is the opposite

Palo Alto Networks has almost the mirror-image problem. Its broad platform gives enterprises a single vendor across network, cloud and security operations, and acquisitions have expanded that reach. Bernstein's downgrade reflects the price investors are already paying for that strength. Integration costs, a larger share count and slowing growth comparisons raise the hurdle.

Fund positioning does not show investors abandoning either name

Insider Monkey tracked 52 hedge funds holding Zscaler in Q2, up from 46 in Q1. Palo Alto ownership edged up to 89 funds from 87. Fisher Asset Management increased its PANW position 2,143% to about 5.8 million shares.

Zscaler's August 31 short-interest snapshot was about 6.35 million shares — roughly 4.7% of public float and 2.9 days to cover.

Bernstein's call matters because it is not simply bullish cybersecurity commentary. It splits an already crowded trade. Palo Alto may remain the stronger platform business, but Zscaler now has something PANW increasingly lacks: a valuation setup where Wall Street can still imagine a large rerating.