Zscaler shares fall after earnings as cloud security growth slows
Despite strong ARR guidance, investors react to revenue outlook cut in cloud security market
Zscaler shares extended their decline in after-hours trading on Thursday after the cloud security company reported second-quarter results that included lowered revenue guidance, overshadowing an otherwise strong performance during regular trading hours.
The stock, which had surged 7.49% to close at $167.36 during regular trading, reversed course following the earnings release, falling sharply as investors digested the company's revised outlook. The move highlights the sensitivity of high-growth technology stocks to any sign of slowing expansion, even as broader market sentiment for beaten-up tech names showed signs of recovery earlier in the session.
The San Jose-based cloud security specialist, which trades at a roughly $24 billion market capitalization, reported earnings that missed analyst expectations on key metrics. According to the Benzinga earnings report, the company's decision to lower revenue guidance for the remainder of fiscal 2026 was the primary driver of the after-hours sell-off.
Thursday's trading volume surged to 6.2 million shares, significantly above the company's average daily volume of 2-3 million shares, indicating heightened investor interest around the earnings announcement. The elevated volume reflects both the strong regular-session rally and the subsequent after-hours reversal.
The contrast between regular-session gains and after-hours losses underscores a complex market dynamic. Earlier in the day, Zscaler had participated in a broader rally among beaten-up technology stocks, which CNBC reported was one of the few areas moving higher even as Nvidia and other major tech names weighed on the broader market.
Despite the immediate negative reaction to the revenue guidance, the company did raise its fiscal 2026 annual recurring revenue (ARR) guidance to 24% growth, according to a company press release. ARR is considered a critical metric for cloud-based security companies, as it represents committed recurring revenue from customers.
Zscaler's current valuation, with a forward price-to-earnings ratio of 84.03 and price-to-sales ratio of 8.41, suggests investors had been pricing in rapid growth. The company's 52-week high of $336.99 stands more than double its current trading level, indicating significant pressure on growth stocks over the past year. The stock has fallen well below its 50-day moving average of $209.12 and its 200-day moving average of $267.96.
Analysts remain largely bullish on the company's long-term prospects despite the near-term headwinds. The consensus target price stands at $290.27, with 39 analysts rating the stock a buy or strong buy and only 11 recommending hold, according to market data. No analysts currently rate the stock a sell.
The cloud security company, which specializes in zero-trust network access and secure web gateways, faces intensifying competition in the cybersecurity space. Enterprise customers have been scrutinizing their spending on cloud security services more closely as they seek to optimize technology budgets in an uncertain economic environment.
The disparity between the company's decision to raise ARR guidance while lowering overall revenue guidance suggests management may be seeing strong customer retention and renewal rates but slower new business acquisition or deal sizes. This pattern is increasingly common across the software-as-a-service sector as enterprises prioritize existing platform investments over new tool deployments.
Zscaler's performance is being closely watched as a barometer for enterprise IT spending trends, particularly around cloud security investments. The company's results often provide insights into how organizations are approaching digital transformation initiatives and cybersecurity priorities during periods of economic uncertainty.
Investors will be listening closely to management commentary on upcoming earnings calls for more details about the demand environment and the company's strategy for navigating competitive pressures in the cloud security market.