Zscaler's Guidance Miss Sparks Growth Concerns After Strong Quarter

What happened

Zscaler reported robust quarterly results that initially drove its stock price higher, reflecting investor confidence in its performance. However, the company issued weaker-than-expected forward guidance, leading to a sharp 7% decline in after-hours trading and erasing earlier gains. This guidance miss contrasts with the DeepValue report's emphasis on Zscaler's leadership in Zero Trust security and strong cash generation, such as a 27% free cash flow margin in fiscal 2025. Despite its scale and enterprise penetration, the lowered outlook raises questions about the company's ability to meet ambitious FY26 targets amid competitive and macroeconomic pressures. Investors are now scrutinizing whether execution shortfalls could undermine the long-term growth narrative.

Implication

This event highlights the critical need for investors to monitor Zscaler's adherence to its FY26 guidance, as any material shortfalls could trigger a downgrade from the current 'BUY' stance. The company's strong cash position and free cash flow generation offer some downside protection, but sustained weakness in billings or margins would pressure the investment case. Competitive intensity and integration complexities, such as with Red Canary, could exacerbate these challenges if not managed effectively. Investors should closely watch product rollouts like AI Guard and public-sector wins for signs of traction or delays. Overall, while secular tailwinds in Zero Trust remain, the guidance miss underscores the importance of execution in maintaining growth momentum.

Thesis delta

The weak guidance introduces uncertainty into Zscaler's growth trajectory, potentially shifting the thesis toward a more cautious stance if execution falters in future quarters. However, the company's strong cash flow and market leadership provide a buffer, keeping the 'BUY' rating contingent on improved guidance adherence.