Zscaler tanks 31% for worst day ever on 'prudent' guidance, sales shakeup

Zscaler experienced a staggering drop of over 30% in its stock price on Wednesday, marking the company's most significant single-day decline to date. This sharp downturn followed the release of guidance that failed to meet market expectations, despite the firm reporting fiscal third-quarter results that were better than anticipated. The cybersecurity firm projected a year-over-year growth of only 16% to 17% in its annual recurring revenue for the fiscal year 2027, which fell short of analyst predictions. Zscaler estimated revenues for the upcoming quarter to be between $875 million and $878 million, slightly under the $878.6 million forecast by FactSet. Looking ahead, Zscaler anticipates its annual recurring revenue for FY2026 will reach between $3.74 billion and $3.75 billion, reflecting an approximate growth rate of 24%. However, the company is navigating challenges related to leadership changes, having lost two key sales executives. CFO Kevin Rubin emphasized a cautious approach to forecasting during this transitional phase. The ongoing memory crunch, coupled with rising prices, is expected to push capital expenditures up by 200 basis points relative to revenues in the fiscal year 2027. CEO Jay Chaudhry highlighted the company's disciplined approach to guidance while recognizing the growing opportunities in the cybersecurity landscape, stating, "The need for cybersecurity has never been bigger." Zscaler is also collaborating with Anthropic on Project Glasswing, a venture designed to test the capabilities and vulnerabilities of an advanced model before its public release. Despite facing a challenging market sentiment regarding software stocks, exacerbated by fears that artificial intelligence might disrupt existing business models, the need for enhanced cybersecurity measures is prompting businesses to invest more in defense strategies. Over the past year, Zscaler's stock has lost half of its value. Nonetheless, the company reported adjusted earnings of $1.08 per share on $850 million in revenue for the fiscal third quarter, surpassing analyst expectations of $1.01 for adjusted EPS on approximately $835 million in revenue. Following this report, Evercore ISI revised its rating for Zscaler’s shares from outperform to in line and lowered the price target, citing the disappointing FY2027 outlook and ongoing leadership changes as factors contributing to a potentially stagnant stock performance in the coming quarters.