Zscaler's Plunge: A Classic "Sell the News" Play on Priced-In Disappointment

The steep drop in Zscaler's stock is a textbook case of "sell the news." The market has already discounted a negative earnings surprise relative to the whisper number, leaving little room for disappointment when the actual print arrives. The setup is clear from the price action: the stock is down 19.84% over the past five days and 32.04% over the past 20 days. It hit a new 52-week low yesterday, trading near $142.43 after closing at $159.75 the day before. This isn't a reaction to a single bad headline; it's the market pricing in a reset of expectations long before the official report.

Analyst sentiment has been shifting to match this reality. Just last week, JPMorgan lowered its price target on Zscaler to $267 from $354. That move signals a formal guidance reset and a lowered forward view, aligning with the stock's dramatic decline. The expectation gap was widening, and the market was selling into it. The company's own guidance, which called for Q2 EPS of $0.89-$0.90, was already seen as a potential ceiling. With the stock having fallen nearly 32% in just three weeks, the whisper number for the upcoming report was likely set well below that already conservative target. The plunge we're seeing is the market's way of saying the bad news was already priced in.

The Q2 Print: Measuring the Expectation Gap

The market is now waiting for the actual numbers to hit the tape. For Zscaler's Q2, the consensus expectations are set at EPS of $0.89 and revenue of $798.9 million. That revenue figure implies a year-over-year growth rate of about 26%. On the surface, that seems like a modest target. But the real test is the bar the company itself just set last quarter.

In its first quarter, Zscaler delivered a clean beat, posting $0.96 EPS against a $0.85 estimate and $788.1 million in revenue versus a $773.86 million consensus. More importantly, the underlying momentum was strong, with revenue growing 26% year-over-year and ARR growing 26% year-over-year. The company also saw deferred revenue jump 32% year-over-year. These are not just numbers; they are the fuel for the growth narrative that powered the stock for years.

The expectation gap here is clear. The market is now pricing in a slowdown. The Q2 guidance of $0.89-$0.90 EPS is a potential ceiling, not a floor. Given the stock's dramatic fall, the whisper number for this report is likely well below that already conservative target. The prior quarter's performance, with its beat on both top and bottom lines, has already been fully digested. The high bar is set by that 26% growth rate and the robust ARR and deferred revenue metrics. Any print that fails to match or exceed that trajectory will be seen as a disappointment, triggering another wave of selling. The market isn't looking for a beat; it's looking for a reason to believe the worst is over.

The Valuation Reset: From "Buy the Rumor" to "Sell the News"

The market's shift from "buy the rumor" to "sell the news" is now fully reflected in the valuation. The numbers tell a story of a severe reset. Over the past 120 days, Zscaler's stock has plunged 48.58%. That's a far deeper decline than the broader software selloff, indicating investors are pricing in a fundamental change in growth expectations. Year-to-date, the drop is still 36.66%, showing the reset is ongoing. This isn't just a correction; it's a re-rating of the company's future cash flows.

The consensus price target of $303.97 implies significant upside from current levels near $142. Yet that target sits in a high-risk environment. The stock's recent volatility is extreme, with a 12.85% daily volatility and a 10.05% intraday amplitude. This turbulence signals that the market is pricing in high uncertainty and is ready to sell on any negative catalyst. The recent 52-week low of $159.66 is a key technical level. The stock has already tested that floor, trading as low as $141.56 earlier today. A decisive break below that level could trigger further algorithmic selling and widen the expectation gap, as the market seeks a new, lower baseline for the stock's worth.

The bottom line is that the valuation reset is complete. The market has already sold the stock based on a reset of expectations. The remaining question is whether the upcoming earnings report can provide a new catalyst to shift sentiment back toward the consensus price target. For now, the setup is one of high risk and high volatility, where the stock's path is dictated by whether the reality of its growth trajectory can finally meet the lowered expectations that are now priced in.

Catalysts and Risks: The Post-Earnings Scenario

The immediate catalyst is the Q2 earnings call scheduled for Thursday, February 26th. The market's reaction will hinge on whether the print beats the whisper number or confirms the lowered expectations that have already been priced in. The consensus expects EPS of $0.89 and revenue of $798.9 million. Given the stock's 32% decline over the past month, the whisper number is likely well below that already conservative target. A clean beat could provide a temporary relief rally, but it would need to be substantial to close the expectation gap. More likely, the market will scrutinize the details for signs of a growth slowdown.

The primary risk is a guidance reset for the full fiscal year. Management has already set its FY 2026 EPS guidance at $3.78-$3.82, but any commentary suggesting that this range is under pressure could force another round of price target cuts and accelerate the sell-off. The market is now in a "sell the news" mode, where even neutral or slightly positive updates may be met with skepticism if they fail to exceed the deeply discounted baseline.

Investors should watch management's commentary on two key leading indicators: ARR growth and deferred revenue trends. In the first quarter, both grew 26% year-over-year, a strong signal of future revenue. Any deceleration in these metrics would be a major red flag, confirming that the robust growth momentum is fading. Conversely, if management can reaffirm or even raise these forward-looking metrics, it could begin to rebuild confidence and shift the narrative from a reset to a potential turnaround. For now, the call is the final test of whether the bad news was truly all in the price.