Shares of Zscaler (ZS) plunged more than 23% in Wednesday’s premarket trading.

The cybersecurity company reported better-than-expected quarterly earnings.

However, its cautious guidance heightened concerns over slowing customer acquisition, rising competition, and higher AI-related infrastructure costs.

The sharp selloff highlighted growing investor sensitivity toward software companies whose valuations remain heavily dependent on sustained high growth, particularly in cybersecurity where competition has intensified sharply over the past year.

While Zscaler exceeded Wall Street expectations on both revenue and profit during its fiscal third quarter, analysts said the company’s conservative outlook and softer momentum in winning new customers overshadowed the otherwise solid results.

Earnings beat fails to reassure investors

Zscaler reported adjusted earnings of $1.08 a share for the fiscal third quarter, up from 84 cents a year earlier and ahead of analyst estimates of $1.01 a share, according to FactSet.

Revenue rose 25% year over year to $850.5 million, also surpassing Wall Street expectations of $835.6 million.

However, on a reported basis, the company posted a net loss of $13.9 million compared with a loss of $4.1 million a year earlier.

The company modestly raised its full-year outlook, forecasting revenue between $3.32 billion and $3.33 billion and adjusted earnings per share of $4.10 to $4.11.

That marked an increase from its prior guidance range of $3.31 billion to $3.32 billion in revenue and earnings of $3.99 to $4.02 a share.

Still, investors focused primarily on weaker-than-expected fiscal fourth-quarter revenue guidance.

Zscaler projected fourth-quarter revenue of $875 million to $878 million, slightly below analyst expectations of $878.6 million.

The company forecast fourth-quarter earnings of $1.08 to $1.09 a share, above Wall Street estimates of $1.03 a share.

Chief Financial Officer Kevin Rubin said the company was taking a cautious stance toward future growth.

“We are taking a prudent approach to our guidance,” Rubin told analysts during the earnings call.

Customer acquisition emerges as a key concern

A major source of investor concern centered on slowing new customer growth, an issue management openly acknowledged during the analyst call.

“The area that we haven’t been performing as well as we’d like is new logo,” Rubin said, referring to new customer acquisition.

“It certainly is a large priority for us.”

Rubin added that the company was taking a “tempered view” of customer acquisition heading into the next fiscal year.

Executives said Zscaler has historically built a strong presence among large enterprise customers, but is now increasingly focusing on mid-sized organizations with between 2,000 and 10,000 users in an effort to broaden growth opportunities.

The company plans to expand sales efforts targeting smaller enterprises, while also introducing new customer incentives and strengthening relationships with channel partners and global system integrators.

Leadership turnover has further complicated the situation.

Rubin disclosed that two key sales leaders departed the company at the end of the latest quarter, contributing to management’s cautious outlook.

AI boom creates cost pressures

Zscaler is also grappling with rising infrastructure costs as AI-related demand strains the broader technology supply chain.

The software industry has faced surging memory prices as AI developers aggressively purchase chips and data-center hardware, tightening supply across the sector.

Rubin said Zscaler has accelerated purchases of data-center equipment in an attempt to lock in pricing before costs rise further.

That strategy is now pushing up capital expenditure expectations.

The company said it expects current-quarter capital expenditures to reach a high single-digit percentage of revenue, up from earlier projections of a mid-single-digit percentage.

The spending increase comes as cybersecurity companies invest more heavily in AI-driven security infrastructure and cloud-based networking capabilities.

Analysts warn of rising competition

Several Wall Street firms lowered their price targets on Zscaler following the results, citing both execution concerns and intensifying competition in the secure access service edge, or SASE, market.

Morgan Stanley cut its price target on Zscaler shares to $145 from $155 while maintaining an Equalweight rating.

The bank had already downgraded the stock in April after identifying rising competitive pressure in the cybersecurity space.

Morgan Stanley analysts said Zscaler’s forward guidance, excluding its acquisition of Red Canary, continued to weaken as customer acquisition trends disappointed management expectations.

The bank pointed to mounting competition from rivals, including Palo Alto Networks, Netskope, and Cato Networks.

Morgan Stanley said the weakness appeared to reflect not only internal execution issues but also increasingly aggressive competition across the SASE market.

The firm added that the stock could remain under pressure in the near term.

Meanwhile, Truist Securities lowered its price target on Zscaler to $200 from $250 while maintaining a Buy rating.

Stifel also reduced its target price to $175 from $180 but maintained a Buy recommendation.

Stifel analysts said much of the disruption surrounding the quarter appeared “idiosyncratic,” pointing specifically to sales leadership departures and confusion around guidance assumptions tied to Red Canary.

Still, the firm warned that broader weakness across cybersecurity stocks and shifting investor sentiment toward software valuations could continue weighing on the sector.

For investors, the latest results reinforced a growing divide within enterprise software markets.

Strong AI-driven demand continues boosting spending on cybersecurity infrastructure.

However, slowing customer growth and intensifying competition are making it harder for companies to sustain the premium valuations Wall Street once rewarded.

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