Zscaler (ZS) Shares Plunge 21% as Weakened Cash Flow and FY27 Outlook Spook Investors

Key Highlights

• Shares of Zscaler tumbled more than 21% in premarket hours following a reduction in full-year free cash flow margin projections from 26.5–27% to 22.8–23.3%.
• Third-quarter results showed revenue of $850.5 million, representing 25% yearly growth, while adjusted earnings per share of $1.08 surpassed the Street estimate of $1.01.
• Management’s preliminary fiscal 2027 ARR and revenue growth projection of 16–17% disappointed investors expecting over 20% expansion.
• The departure of two key sales executives raised additional questions about the company’s near-term execution capabilities.
• Wall Street firms responded by lowering price targets, with Truist moving to $200, Mizuho to $185, Morgan Stanley to $145, and Evercore ISI issuing a downgrade.

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Shares of Zscaler (ZS) experienced a sharp decline exceeding 21% during Wednesday’s premarket session on May 27, compounding a nearly 17% after-hours retreat the previous evening. The cloud security provider triggered the selloff by reducing its free cash flow projections and issuing cautious fiscal 2027 growth expectations.

Zscaler, Inc., ZS

Premarket activity saw shares trading around $143.90, representing approximately $40 less than Tuesday’s closing price of $184.60.

The third quarter delivered impressive financial performance. The company posted revenue of $850.5 million, marking a 25% increase from the year-ago period and exceeding internal projections. Adjusted earnings per share reached $1.08, topping analyst consensus of $1.01. Annual recurring revenue climbed 25% to $3.53 billion.

The market’s negative reaction centered on forward-looking guidance rather than historical results.

Management slashed its full-year free cash flow margin forecast to a range of 22.8–23.3%, significantly below the previous 26.5–27% outlook. The company attributed this revision to elevated capital expenditures aimed at securing favorable pricing on memory, storage, and processors before anticipated cost inflation.

The preliminary fiscal 2027 outlook intensified investor concerns. Leadership projected ARR and revenue expansion of just 16–17%, substantially beneath the 20%-plus growth trajectory that market participants had anticipated.

Adding to the uncertainty, two senior sales executives exited the organization. Company leadership cited these departures when explaining the conservative fiscal 2027 assumptions, particularly regarding new customer acquisition targets.

Wall Street’s Response

Truist Securities maintained its Buy recommendation while reducing its price objective to $200 from $250. The firm acknowledged solid quarterly performance across revenue, ARR, and profitability metrics, with gross margins reaching 76.63%, though recognized the conservative forward guidance.

Evercore ISI adopted a more cautious stance, downgrading Zscaler from Outperform to In Line, emphasizing leadership transitions and diminished fiscal 2027 expectations.

Mizuho Securities adjusted its target downward to $185 from $210. RBC Capital Markets reduced its objective to $200 from $205 while retaining an Outperform rating. Morgan Stanley lowered its target to $145 from $155, pointing to intensifying competition within the SASE marketplace.

Jefferies struck a more optimistic tone, characterizing the fiscal 2027 ARR guidance as a “much-needed reset” and increasing its fiscal 2026 EPS forecast to $4.12. The firm highlighted the Red Canary and Symmetry acquisitions as potential growth catalysts.

Z-Flex Program and AI Strategy

Analysts identified the Z-Flex program as a positive development. This flexible purchasing model achieved $480 million in total contract value during the third quarter, surging over 60% sequentially and representing roughly 38% of remaining performance obligation bookings.

Chief Executive Jay Chaudhry emphasized the company’s readiness for AI-driven security challenges, referencing collaborations with Anthropic and OpenAI alongside the introduction of its Project AI-Guardian platform.

The organization is also pursuing a $175 million acquisition of Symmetry Systems, currently pending completion.

For the fourth quarter, management projected revenue between $875–$878 million with adjusted EPS of $1.08–$1.09. Full-year revenue guidance received a modest increase to approximately $3.33 billion, marginally above the $3.32 billion Street consensus.

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