Why Bernstein Still Sees 46% Upside in Zscaler (ZS) but Downgraded Palo Alto (PANW)

Wall Street has spent much of 2026 rewarding cybersecurity stocks for the risks created by AI. Bernstein now thinks the easy part of that trade is over, with one major exception.

Bernstein analyst Peter Weed raised his target on Zscaler, Inc. (NASDAQ: ZS ) to $298 and maintained an Outperform rating on September 17. The target implied roughly 46% upside when the call was published. At the same time, Bernstein downgraded Palo Alto Networks, Inc. (NASDAQ: PANW ) and several other cyber names to Market Perform.

The distinction is valuation rather than a belief that AI security demand disappears.

Zscaler entered the analyst call down about 11.5% in 2026 while many peers had rallied. Bernstein argued that its 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.

For Zscaler, Inc. (NASDAQ:ZS), 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.

There is a reason the discount exists. 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 Networks, Inc. (NASDAQ:PANW) has almost the opposite 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.

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.