Key insights
- Zscaler's stock plummeted over 25% following a disappointing sales outlook, attributed to departures of key sales leaders and rising memory costs. Despite beating third-quarter earnings and sales estimates, the cautious forecast and concerns about AI's impact on the cybersecurity sector led analysts to cut price targets. This news signals potential headwinds for software companies reliant on enterprise services and highlights execution risks within the sector.
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Zscaler's stock could be set to lose more than one-quarter of its value in a single session.
Shares of Zscaler (ZS) were down more than 25% in recent trading, a day after the cybersecurity software maker forecast current-quarter sales of $875 million to $878 million, below the $878.6 million analysts were looking for, according to estimates compiled by Visible Alpha.1
Executives said in a letter to shareholders that Zscaler is being "prudent" in its outlook in part because the company lost two key sales leaders in the quarter. One has already been replaced and the other role is in the process of being filled. Rising memory costs are also forcing the company to pull some of its spending plans forward to secure current prices on equipment before they potentially climb, the company said.2
Slower-than-expected revenue growth could add to worries about AI and competition in the cybersecurity space impacting Zscaler's business.
UBS analysts cut their price target for the stock to $225 from $260 following the results, pointing to the cautious outlook.3 Wedbush analysts also trimmed their target to $220 from $300, and said investors will need to see better execution from Zscaler going forward.4
The weak forecast outweighed otherwise solid results, as Zscaler's adjusted earnings of $1.08 per share on $850.5 million in sales for the fiscal third quarter each came in above analysts' forecasts compiled by Visible Alpha.
Zscaler shares have struggled this year along with the broader software sector, amid worries that developments in AI products could allow companies to build their own software and cut spending on services from companies like Zscaler.
With Wednesday's slump, Zscaler shares are down roughly 40% since the start of the year.
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