Is Zscaler Stock a Buy After Its Share Price Plummets?

Shares of Zscaler (NASDAQ: ZS) were pounded after the cybersecurity company issued a weak outlook in its fiscal 2026 Q3 results following the close of trading on Tuesday. The stock fell more than 30% on the news and has now seen its share price cut in half over the past year.

Let's take a closer look at the company's results and prospects to see if this dip is a buying opportunity.

Image source: Getty Images.

Zscaler management issues a weak outlook

While Zscaler turned in solid results, it was the company's guidance and departure of two leading sales executives that spooked investors. For Q4, it forecast revenue to grow 22% year over year to between $875 million and $878 million, which was just below the $878.6 million consensus compiled by Visible Alpha. Meanwhile, it projected annual recurring revenue (ARR) for fiscal 2027 to grow between 16% and 17%, which was also below expectations.

The company blamed the change in its sales leadership and struggles attracting new customers for the cautious outlook. Notably, the company's Red Canary acquisition has also been exceeding expectations, which is good news but also indicates that its core business has been weaker than expected. Red Canary is projected to contribute $136 million in ARR in fiscal 2026, up from a prior outlook of $130 million, and full-year new ARR growth excluding it will be only 9.5%.

Where the company has done well is in expanding with existing customers. It had a solid 115% net dollar retention rate over the past 12 months. Its artificial intelligence (AI) solutions are helping lead the way, with AI Protect seeing more than $100 million in annual bookings.

Meanwhile, the company's Z-Flex contract value has now surpassed $1 billion, including $480 billion in just Q3. Z-Flex is a credit-based licensing model that lets customers add, expand, or swap security modules as needed.

Turning to Zscaler's results, its revenue climbed 25% year over year to $850.5 million, easily topping management's previous guidance of $834 million to $836 million. ARR also rose 25% to $3.525 billion, while excluding Red Canary, it increased by 21%.

Adjusted earnings per share (EPS) jumped to $1.08 from $0.84 a year earlier. That was also well ahead of the company's $1.00-to-$1.01 forecast.

Is it time to buy the dip?

Zscaler continues to hold a strong position in the zero-trust security market, and its flexible payment program, Z-Flex, appears to be resonating with current customers. However, the loss of two sales executives is a blow, and the struggle to add new customers is a concern.

After its big sell-off, Zscaler now trades at a forward price-to-sales multiple of about 5 times based on analysts' consensus estimates for fiscal year 2027. That's not overly expensive, and its forecast looks conservative. However, with core growth slowing and the loss of two sales execs, the stock will likely be stuck in the mud for some time. As such, I wouldn't be in a rush to buy it.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zscaler. The Motley Fool has a disclosure policy.