Zscaler Stock Drops 30%: Why the Dip Is a Buy Opportunity

Goldman Sachs just told you what to buy (most people missed it) (From Behind the Markets)

Zscaler’s (NASDAQ: ZS) stock price tanked by 30% following its fiscal Q3 earnings report and guidance update, opening a solid buy-the-dip opportunity. While mixed, the results weren’t the cause of the dip so much as the spending plans. The company aims to increase spending on AI, hoping to capitalize on robust demand.

While near-term headwinds are weighing on price action today, long-term growth opportunities support a thesis for higher prices, and the rebound may come more quickly than the initial price plunge suggests.

The stock fell by 30% by midday, a hefty decline. However, Zscaler’s price had risen by approximately 60% in the weeks leading up to the release, setting it up for a correction. The question is what comes next, and price patterns suggest a rebound is the most likely outcome. The market has shown ample support within the $120 to $140 range, making the price plunge an opportunity to buy.

Sell-Side Activity Provides Floor for ZS Stock

Buyers include sell-side participants. While analysts are lowering price targets, the market is overreacting, moving below the lower end of targets and into deep-value territory, and institutions have been buying. Analysts are reaffirming their sentiment ratings, indicating a Moderate Buy with a bullish bias, and see a solid double-digit rebound at consensus. The worst-case scenario is that sentiment trends continue to limit upside until later in the year or early 2027, while the best-case is that catalysts emerge as soon as the fiscal Q4 release and the 2027 guidance update.

Institutional activity is noteworthy. The group owns more than 85% of the stock and has been buying in 2026. The group sold in Q3 2025, reverted to accumulation in Q4, and then sustained the trend into early Q2 2026. The likely outcome is that institutions continue buying, given the lower price point, and underpin support at 2026 lows. The risk is that they start selling, but the growth outlook gives no reason to believe that will happen. Zscaler has emerged as a mission-critical element in enterprise cloud security, expanding its services, deepening its penetration, and entering new verticals.

Growth Impresses, But Cash Flow Gives the Market Pause

Zscaler had a solid fiscal Q3 with revenue growing by nearly 25.5% to over $850 million. The record-setting result outperformed MarketBeat’s reported consensus by nearly 200 basis points, driven by client wins and penetration gains. Annual recuring revenue grew by 25% overall, 21% organically, and 14% from net new contracts. Margin news was also solid, with adjusted net income up by 30% and adjusted earnings per share (EPS) of $1.08, 700 bps better than forecast, but there was a small problem for the market. Cash flow fell year-over-year (YOY) due to increased spending, and capital expenditure is expected to remain elevated in the upcoming quarters.

Even so, the guidance is good. While Q4 revenue was forecast with a mid-point below the consensus, it expects 22% growth and a strong margin. Adjusted EPS is forecast above consensus, and strength is expected in full-year results as well. Guidane for fiscal 2026 revenue growth was raised to 24.56% with $4.10 in adjusted EPS compared to the $4.02 consensus.

Navigating Zscaler Risks and Catalysts in 2026

Zscaler’s primary catalyst this year and next will be the recovery in free cash flow margin. Accelerated investments in memory, compute, and storage are cutting into free cash flow and giving investors cause for concern. The opportunity is steady recovery and eventual improvement as investments turn into growth, scale, and improved earnings leverage. The question is how soon margin recovery will begin, and that may not happen until later in 2027.

Execution and turnover are among the risks. The company lost critical members of its sales team and will take time to recover, creating uncertainty about future growth. Meanwhile, the high stock price multiple leaves little room for missteps, including the lackluster integration of Red Canary. Red Canary was expected to be a growth pillar and has so far failed to accelerate growth. It aims to turn Zscaler into a comprehensive, next-gen AI-driven security operations center.

What the market is misunderstanding about Zscaler is that although capital expenditure is a near-term problem, it is also part of the long-term solution. Zscaler’s platform is becoming more indispensable to its users by the quarter, with the Red Canary acquisition positioning it as a go-to player in a highly profitable industry. Margin recovery will come, when it does, Zscaler’s cloud-native cybersecurity business will be more entrenched, with more clients, and more services to drive long-term cash flow and shareholder value.

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