Zscaler Faces Growth Reckoning as Strong Quarter Fails to Mask Deceleration

Zscaler beat Q3 estimates but its FY2027 growth forecast of 16-17% and sales leadership departures triggered a 32% stock rout, leaving Wall Street divided.

The cybersecurity firm Zscaler is sending mixed signals to the market. While its stock clawed back 2.6 percent to around €115 on Friday, that modest gain comes after a brutal 32 percent rout that has left the shares more than 60 percent below their 52-week high of €292. The recovery attempt has been met with a split verdict from Wall Street — some analysts are upgrading from the depths, while others have slashed their price targets in response to a growth outlook that has suddenly turned far less confident.

Analyst Divergence Signals Deep Uncertainty

Zacks Research raised its rating on Zscaler from ‘Strong Sell’ to ‘Hold’ last week, a move the firm framed not as a vote of confidence but as a pragmatic recalibration after the steep decline. On the other side of the spectrum, Evercore ISI delivered the sharpest cut: downgrading the stock from ‘Outperform’ to ‘In Line’ and slashing its target from $225 to $155, citing changes in sales leadership and a weaker outlook for fiscal 2027. Wells Fargo, meanwhile, has kept its buy rating with a $180 target, and among the 41 analysts tracked by Zacks, 32 still recommend buying, eight say hold, and just one recommends selling. The consensus price target sits near $216 — well above the current level of roughly $130, lending little immediate comfort.

Solid Quarter Overshadowed by Softer Guidance

Zscaler’s fiscal third-quarter results, released on 26 May, showed genuine operational strength. Revenue reached $850.5 million, up 25 percent year over year, while adjusted earnings per share of $1.08 beat expectations. Annual Recurring Revenue (ARR) hit $3.525 billion, also climbing 25 percent, or 21 percent on an organic basis excluding the Red Canary acquisition. The non-GAAP operating margin improved to 23 percent from 22 percent a year earlier. Yet the market punished the stock anyway — a stark reminder that investors buy the future, not the past.

The problem lies in what comes next. Zscaler’s own forecast for fiscal 2027 calls for revenue and ARR growth of just 16 to 17 percent, a sharp slowdown from the 25 percent pace the company is currently delivering. That deceleration, along with a downward revision to the free-cash-flow margin for fiscal 2026 to between 22.8 and 23.3 percent — driven by higher spending on compute and storage capacity — triggered the selloff. Even though Zscaler raised its full-year fiscal 2026 revenue guidance slightly to around $3.33 billion and projects fourth-quarter revenue of $875 million to $878 million (roughly 22 percent growth), the market is already pricing in a lower-growth trajectory.

Sales Leadership Exodus Compounds the Growth Worry

The reaction is not solely about the numbers. Two senior sales executives left the company abruptly around the time of the earnings release. For a firm dependent on large enterprise deals, these departures strike at the heart of its growth engine. Institutional investors, who hold just under 46.5 percent of the stock, are likely to scrutinise the next quarterly report in August for signs that the sales team has stabilised. Evercore ISI specifically cited the changes in sales leadership as a reason for its downgrade, and TD Cowen also lowered its target from $220 to $180, pointing to a slower growth trajectory. Other cuts included Truist Securities from $250 to $200 and Freedom Broker from $270 to $230, though the latter maintained its buy recommendation. RBC Capital kept its $205 target and outperform rating.

AI Security Bet and an Acquisition

Amid the noise, Zscaler is pressing ahead with its strategic pivot around artificial intelligence. The company announced the acquisition of Symmetry Systems, a 2019 startup that specialises in data relationship analysis and identity mapping. Its "access graph" technology shows which identities have permission to use specific SaaS applications and AI assets. The plan is to integrate this capability into Zscaler’s zero-trust platform to govern the rapidly growing number of AI agents. A purchase price was not disclosed. The transaction is seen as a logical expansion of Zscaler’s security portfolio, but it does little to address the near-term growth deceleration that is dominating investor focus.

Valuation Reset and the August Catalyst

Since the start of the calendar year, Zscaler shares have dropped more than 40 percent in dollar terms. The stock now trades at a significant discount to its historical multiples, but with growth expected to slow to the mid-teens next fiscal year, many analysts argue the current valuation still lacks a clear catalyst for a sustained re-rating. Whether Zero Trust, SASE, and AI security can re-accelerate the growth rate will be tested when Zscaler reports fourth-quarter results, expected sometime in August. For now, the market is watching for evidence that the sales team is back on solid ground and that the deceleration is not a structural trend.