Zscaler (ZS) Stock Drops as Analysts Cut Price Targets Post Earnings

TLDR

• Zscaler stock dropped over 23% after Q3 earnings beat was overshadowed by weak Q4 guidance
• Q3 revenue came in at $850.5M, up 25% YoY, with EPS of $1.08 vs $1.01 estimate
• Q4 revenue guidance of $875M–$878M came in just below analyst expectations of $878.6M
• CFO flagged slowing new customer wins and the departure of two key sales leaders
• Multiple analysts cut price targets; Morgan Stanley trimmed to $145, UBS to $225, Mizuho to $185

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Zscaler stock fell more than 23% in premarket trading Wednesday after the company’s cautious Q4 outlook rattled investors, despite a solid Q3 earnings beat.

Zscaler, Inc., ZS

ZS opened at around $127 before the selloff, with the drop wiping out a large chunk of its recent gains.

Q3 adjusted EPS came in at $1.08, ahead of the $1.01 estimate. Revenue rose 25% year over year to $850.5 million, topping Wall Street’s $835.6 million forecast.

On a reported basis, though, the company posted a net loss of $13.9 million, wider than the $4.1 million loss in the year-ago period.

The company raised its full-year revenue guidance to $3.32–$3.33 billion and adjusted EPS to $4.10–$4.11. That’s a modest step up from prior guidance of $3.31–$3.32 billion in revenue and $3.99–$4.02 in EPS.

But the market focused on Q4. Zscaler guided for Q4 revenue of $875M–$878M, just below the $878.6M analysts had penciled in. Q4 EPS guidance of $1.08–$1.09 did come in above the $1.03 consensus.

CFO Kevin Rubin described the approach as “prudent,” but investors weren’t convinced.

New Customer Growth Raises Flags

The bigger issue may be new logo growth — or the lack of it.

Rubin acknowledged on the earnings call that new customer acquisition had underperformed. “The area that we haven’t been performing as well as we’d like is new logo,” he said, calling it “a large priority.”

He added the company is taking a “tempered view” on customer wins heading into the next fiscal year.

Zscaler said it plans to push harder into mid-market companies with 2,000 to 10,000 users. It also plans to roll out new customer incentives and lean more on channel partners.

Adding to the uncertainty, two senior sales leaders left at the end of the quarter. Rubin flagged the departures as part of what’s shaping the cautious outlook.

Analysts Trim Targets Across the Board

Wall Street responded quickly with a wave of price target cuts.

Morgan Stanley analyst Meta Marshall cut her target to $145 from $155, maintaining a Hold. She had already downgraded the stock in April citing rising competition, and warned ZS will stay in the “penalty box” until its SecOps product shows more traction.

UBS dropped its target to $225 from $260. RBC cut to $200 from $205. Mizuho trimmed to $185 from $210. BMO came down to $178 from $210.

Truist cut its target to $200 from $250 but kept a Buy. Stifel lowered to $175 from $180, also keeping Buy, calling the disruption “idiosyncratic” and pointing to sales leadership changes and confusion around Red Canary guidance assumptions.

Morgan Stanley flagged mounting competition from Palo Alto Networks, Netskope, and Cato Networks as a growing headwind.

On the cost side, Zscaler said it’s accelerating data-center equipment purchases to get ahead of rising AI-related infrastructure costs. Capital expenditure guidance was raised from a mid-single-digit to a high-single-digit percentage of revenue.

The most bullish voice on the Street remains Cantor Fitzgerald’s Jonathan Ruykhaver, who kept a Buy and a $300 target — implying over 136% upside from current levels.