Bernstein's Palo Alto Downgrade, Zscaler Upgrade Highlight

Bernstein analyst Peter Weed raised his target on Zscaler, Inc. To $298 and maintained an Outperform rating on September 17. The same day, the firm downgraded Palo Alto Networks, Inc. And several other cybersecurity names to Market Perform. The $298 target for Zscaler implied roughly 46% upside when published. According to Bernstein, the distinction is valuation rather than a belief that AI security demand disappears.

Zscaler's operational progress

Bernstein argued Zscaler's shift from opportunity-based selling toward deeper customer relationships is beginning to work. The company reported a 115% dollar-based net retention rate in its fiscal first quarter. Management noted this rate had remained fairly stable for several quarters. Hedge fund interest also increased, with 52 funds holding the stock in the second quarter, up from 46 in the prior quarter.

Palo Alto's platformization strategy

Palo Alto Networks has almost the opposite problem. Its broad platform gives enterprises a single vendor across network, cloud and security operations. The company is integrating several acquisitions while expanding into rapidly evolving AI-security markets. Its platformization strategy involves consolidating multiple security tools and processes into a unified platform.

Recent moves include the September 22 launch of Unit 42 Continuous Frontier AI Defense, an annual subscription service using multiple AI models. The company also acquired Portkey, which adds an AI gateway, while Koi expands agentic endpoint security and CyberArk adds identity security.

The strategy is showing traction. In Q4 of fiscal 2026, Palo Alto finished with around 2,500 platformizations, adding a net 220 during the quarter. The net retention rate of these platformized customers exceeds 120%. More than 65% of its Next-Generation Security Annual Recurring Revenue now comes from platformized customers. That NGS ARR jumped 63% to $9.1 billion in the quarter, a figure that benefited from acquisitions.

The company is on track to deliver more than 4,000 platformizations. It expects platformizations to drive the majority of its targeted $20 billion NGS ARR in fiscal year 2030.

Investor positioning and risks

While Fisher Asset Management increased its Palo Alto stake by 2,143% to about 5.8 million shares, Bernstein warns the stock’s valuation already reflects its platform strength. Integration costs, a larger share count and slowing growth comparisons raise the hurdle for Palo Alto. The number of hedge funds holding its shares increased slightly to 89 in the second quarter from 87. Its short interest stands at 2.66% of the float.

Bernstein's downgrade reflects the price investors are already paying for that strength. Palo Alto may remain the stronger platform business, but Zscaler now has something it increasingly lacks: a valuation setup where Wall Street can still imagine a large rerating. If customers continue buying from multiple vendors instead of consolidating around Palo Alto, platformization may generate less ARR growth than expected. Some analysts see a more attractive risk-reward elsewhere than Palo Alto and Zscaler.

Zscaler's market dynamics

Zscaler entered the analyst call down about 11.5% in 2026 while many peers had rallied. It 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 a separate budget.

Its short-interest snapshot from August 31 was about 6.35 million shares, representing roughly 4.7% of the public float and equating to 2.9 days to cover. Bernstein's call is not simply bullish cybersecurity commentary but draws a line inside an already popular trade. Gartner estimates global information-security spending will increase about 12% this year to reach $244 billion. Palo Alto Networks is on track to deliver more than 4,000 platformizations as part of its fiscal 2030 NGS ARR goal.