Zscaler Inc (NASDAQ:ZS) shares plunged 31.52% on Wednesday, May 27, marking one of the sharpest selloffs among major U.S. technology companies in recent years, even after the cloud cybersecurity provider delivered quarterly results that topped Wall Street expectations across key financial measures.
For the third quarter of fiscal 2026 ended April 30, Zscaler reported revenue of $850.5 million, representing 25% year-over-year growth and exceeding analyst estimates of $835.7 million. Non-GAAP earnings came in at $1.08 per share, ahead of consensus forecasts of $1.01, while annual recurring revenue (ARR) increased 25% to $3.525 billion. The company also posted a record non-GAAP operating margin of 23%.
Despite the stronger-than-expected results, investors reacted negatively after management lowered its annual free cash flow margin guidance to a range of 22.8% to 23.3%, down from the previous forecast of 26.5% to 27%.
Executives attributed the reduction to accelerated purchases of IT infrastructure components, including memory, storage, and processors, aimed at getting ahead of rising hardware costs. However, the revision unsettled investors because Zscaler’s premium valuation has long been supported by its relatively asset-light cloud business model. Increased spending on physical infrastructure raised concerns that the company’s operating structure may become more capital intensive than previously expected.
Selling pressure intensified further after the company issued fourth-quarter guidance that came in slightly below market expectations, adding to worries about near-term growth visibility.
Even after the sharp decline, some valuation models suggest the stock may now be trading below intrinsic value. InvestingPro’s Fair Value model estimates Zscaler’s value at $199.80 per share, implying potential upside of roughly 58% from post-selloff levels. Wall Street analysts remain broadly optimistic as well, with a strong buy consensus and an average price target of $222.03, suggesting possible upside of more than 75%.
Still, several risks remain for investors evaluating the pullback. The reduction in free cash flow expectations could prompt analysts to revise future forecasts lower, while Zscaler continues to trade at elevated valuation multiples relative to the broader market even after the correction.
Competition within the cybersecurity industry is also becoming increasingly intense, with rivals including CrowdStrike, Palo Alto Networks, and Microsoft continuing to expand their presence in cloud security markets. In addition, the softer-than-expected fourth-quarter outlook highlights lingering uncertainty surrounding the company’s short-term growth trajectory.