Zscaler tumbles 25% despite beat; fundamentals intact but execution and margin risk stay front and center

What happened

Zscaler’s share price plunged roughly 25% in a sentiment-driven sell‑off despite a quarter that beat expectations and slightly raised FY26 guidance. The Motley Fool frames the move as a buying opportunity, citing a strengthening revenue pipeline and potential growth acceleration. The DeepValue master report agrees the company remains fundamentally strong—ARR just north of $3.0B, fiscal 2025 FCF margin of 27%, roughly $3.6B in cash, and FY26 guidance targeting ~$3.27B revenue and ~$3.68–$3.70B ARR. However, filings also show modest pressure on gross margin, persistent GAAP losses, and an intensely competitive SASE/SSE market that can compress pricing and elongate deal cycles. The decisive monitoring points remain execution against ARR, calculated billings and deferred revenue plus margin stabilization; repeated misses would materially weaken the current buy thesis despite the apparent short‑term valuation relief.

Implication

For long-term investors, the 25% drop can present a disciplined buying opportunity given Zscaler’s scale, strong cash balance and 27% FCF margin—provided you accept the platform will continue to invest and post GAAP losses. Do not treat the headline as proof the business is mispriced: validate future purchases against execution metrics (ARR growth, calculated billings, deferred revenue and reported billings) rather than press narratives. Maintain close watch on gross margin and FCF margin; stabilization near current levels preserves the case, while sustained erosion toward the low‑20s would be a red flag. Be skeptical of one‑off pipeline language — faster pipeline growth only matters if it converts to booked ARR and billings at acceptable pricing. If management misses guidance or billings decelerate materially, reduce exposure or move to wait‑and‑see until the company demonstrates consistent beat‑and‑raise execution.

Thesis delta

No material change to our BUY stance: the Motley Fool piece highlights a sentiment pullback but adds no new fundamental information. We continue to lean BUY based on scale, cash generation and FY26 guidance, while flagging execution versus ARR/billings and margin stability as the key triggers that could downgrade the thesis.