Zscaler (ZS) Stock Craters 21% After Guidance Cut Overshadows Q3 Win

TLDR

• Zscaler stock dropped over 21% in premarket after the company cut its full-year free cash flow margin guidance to 22.8–23.3%, down from 26.5–27%.
• Q3 revenue came in at $850.5 million, up 25% year-over-year, with adjusted EPS of $1.08 beating the $1.01 consensus.
• The company’s FY27 ARR and revenue growth outlook of 16–17% fell short of the 20%-plus analysts had expected.
• Two senior sales leaders departed, adding to investor concern about near-term growth execution.
• Several analysts cut price targets, including Truist (to $200), Mizuho (to $185), and Morgan Stanley (to $145), while Evercore ISI downgraded the stock.

Zscaler (ZS) stock fell more than 21% in premarket trading on Wednesday, May 27, extending a near-17% drop from after-hours the night before. The sell-off came after the cloud security company cut its free cash flow forecast while also flagging softer growth expectations for fiscal 2027.

Zscaler, Inc., ZS

The premarket price stood near $143.90, down roughly $40 from the prior close of $184.60.

Q3 results were actually strong. Revenue hit $850.5 million, a 25% year-over-year gain, beating the company’s own guidance. Adjusted EPS of $1.08 cleared the $1.01 consensus. Annual recurring revenue also rose 25%, reaching $3.53 billion.

So why the pain? Investors focused on what comes next.

Full-year free cash flow margin guidance was cut to 22.8–23.3%, down sharply from the prior range of 26.5–27%. The company said higher capital expenditure — driven by locking in memory, storage, and processor pricing ahead of expected cost increases — was the main driver.

The FY27 preliminary outlook added more pressure. Management guided for ARR and revenue growth of 16–17%, well below the 20%-plus rate the market had been pricing in.

On top of that, two senior sales leaders left the company. Management cited the departures as a reason for the cautious FY27 assumptions, particularly around new customer growth.

Analyst Reactions

Truist kept its Buy rating but cut its price target to $200 from $250. The firm noted the quarter was solid across revenue, ARR, and profitability, with gross margins at 76.63%, but acknowledged the outlook was conservative.

Evercore ISI took a harder line, downgrading Zscaler to In Line from Outperform, pointing to the leadership changes and weaker FY27 guidance.

Mizuho trimmed its target to $185 from $210. RBC Capital cut to $200 from $205 but held its Outperform rating. Morgan Stanley lowered its target to $145 from $155, citing growing competition in the SASE space.

Jefferies was more constructive, calling the FY27 ARR guide a “much-needed reset” and raising its FY26 EPS estimate to $4.12. The firm flagged the Red Canary and Symmetry acquisitions as growth levers.

Z-Flex and AI Positioning

One bright spot analysts pointed to was the Z-Flex program, Zscaler’s flexible purchasing option. It reached $480 million in total contract value during Q3, up over 60% quarter-over-quarter, and made up roughly 38% of RPO bookings.

CEO Jay Chaudhry positioned the company as built for AI-era security threats, citing partnerships with Anthropic and OpenAI and the launch of its Project AI-Guardian platform.

The company also has a pending $175 million acquisition of Symmetry Systems in the pipeline.

For Q4, Zscaler guided revenue of $875–$878 million and adjusted EPS of $1.08–$1.09. Full-year revenue guidance was raised to approximately $3.33 billion, slightly above the $3.32 billion consensus.

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