Zscaler's stock sees record drop after investors are blindsided by a disappointing outlook

By Hannah Pedone

A revenue outlook for the current quarter that was below Wall Street projections wiped out what had been on track to be the cybersecurity stock's best month ever

Shares of Zscaler were headed for a record one-day drop of more than 31% after the cybersecurity company shocked investors with a downbeat revenue outlook.

Zscaler has been tapped as a favorite cybersecurity stock by some analysts, but investor optimism seems to have unraveled Wednesday after the company's outlook for revenue in the current quarter fell short of expectations.

The company's downbeat forecast also put into question whether the sharp rally in cybersecurity stocks in recent weeks, as the narrative around how artificial intelligence would affect the sector seemed to flip to positive from negative, was justified.

Zscaler's stock (ZS) plummeted 31.5% to a six-week low, for its biggest one-day drop since going public in March 2018, according to Dow Jones Market Data. The current record single-session drop was 19.4% on Sept. 11, 2019.

The selloff was also hurting the company's peers, as the First Trust Nasdaq Cybersecurity ETF CIBR dropped 2.9%.

Late Tuesday, the company said in its third-fiscal-quarter earnings report that it expects revenue for the current fourth quarter through July to be $875 million to $878 million, compared with the analyst consensus estimate compiled by FactSet of $879 million.

That came as a shock to investors, who have been bidding up the stock.

Before earnings were reported, the stock had soared 41.3% through Tuesday, which had put it on course for the best monthly performance since the record 50.4% rally in May 2023. What had been fueling the gains was an emerging idea that the smarter AI gets the more people would need ways to protect themselves from hacks.

Heading into May, cybersecurity stocks were suffering from the AI-disruption narrative that had hurt other software stocks. That worry may have resurfaced for Zscaler, as the stock is now down 3% in May.

Meanwhile, the CIBR ETF was still up 22% in May.

Zscaler had reported after Tuesday's close its revenue and earnings for the quarter to April 30, which were above expectations, but that wasn't enough to please investors. The company reported revenue that rose 25.4% from a year ago to $850.5 million, to beat the FactSet consensus of $835.6 million. And adjusted earnings per share rose to $1.08 from 84 cents and topped expectations of $1.01.

Wedbush analyst Dan Ives followed the results by lowering his price target on the stock to $220 from $300, saying that Zscaler needed to "show better execution to get out of the investor penalty box."

Overall, Ives expects Zscaler to benefit as security becomes more important in the era of AI, he said, but pointed out that the company is facing higher prices due to limited availability of memory and processors, which can affect capital expenditures.

BMO Capital Markets analyst Keith Bachman also lowered his price target, to $178 from $210. He pointed out that Zscaler's organic annual recurring-revenue growth was mostly driven by Red Canary - a cybersecurity subsidiary that specializes in managed detection and response - which Zscaler acquired last August.

He lowered his assumed net new annual recurring-revenue estimate, excluding Red Canary, for the company's fourth quarter, which he said had been "slightly disappointing."

Read more: These cybersecurity stocks are poised for rapid growth through 2028, and some of them are cheap right now

BNP Paribas analyst Andrew DeGasperi shared in comments to MarketWatch that, despite the company's strong internal-growth metrics, management's guidance was "clearly designed to reset expectations" for when the company reports its fourth-quarter earnings this summer.

He also said that the company's recent sales leadership changes remain a concern.

CFO Kevin Rubin said on the company's earnings call that, while Zscaler has already appointed a replacement for one of their sales leaders and is in the late stages of hiring for another role, the company is "taking a prudent approach to our guidance during this transition."

See also: IBM could be a big winner as quantum computing moves out of the science-fiction realm.

In all, no fewer than 26 of the 49 analysts surveyed by FactSet who cover Zscaler lowered their stock-price targets in the wake of the downbeat guidance. But in terms of ratings, 40 remained bullish, while nine analysts were neutral.

-Hannah Pedone

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05-27-26 1843ET