Advances in artificial intelligence (AI) have had a significant impact on many software companies over the last few years. Many are actively looking to integrate new AI features while defending against disruption. Stock analysts have been trying to understand the impact of AI across various software segments and what future earnings will look like, leading to a massive sell-off across the sector earlier this year.
Software stocks aren’t out of the woods yet. A slightly disappointing earnings outlook could send a stock cratering. That was the case with Zscaler (ZS 3.23%), the cybersecurity software company. Its early-2027 guidance came up well short of expectations, sending the stock 32% lower after its report. Shares have bounced back slightly but remain an incredible buying opportunity for long-term investors.
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What will the long-term impact of AI be on this cybersecurity stock?
The big reason for Zscaler’s sell-off after its third-quarter earnings report was management’s guidance for just 16% to 17% annualized recurring revenue (ARR) growth in 2027. That’s a marked slowdown from the 21% it reported last quarter.
The largest contribution to the slowdown is how management is accounting for Red Canary contracts. Zscaler acquired Red Canary, a threat detection and response software company, at the start of fiscal 2026. Management said that without including Red Canary renewals, ARR growth would have been 14% last quarter.
That is to say, Zscaler actually expects some acceleration in ARR growth on a comparable basis. However, it raises questions about whether the company can continue to grow at the pace investors demand without simply buying growth through acquisitions. The company announced yet another acquisition, Symmetry Systems, ahead of its earnings report.
Today’s Change
(-3.23%) $-4.38
Current Price
$130.88
Key Data Points
Market Cap
$21B
Day’s Range
$129.00 – $137.19
52wk Range
$114.63 – $336.99
Volume
174.7K
Avg Vol
4.2M
Gross Margin
76.29%
But Zscaler’s acquisitions aren’t just about showing continued growth. They’re an important strategy as the era of agentic AI takes hold.
Artificial intelligence increases the need for cybersecurity solutions that can cover multiple attack angles and secure networks and systems. Zscaler’s Internet Access and Private Access solutions provide secure routing for internal and external network traffic and help contain malicious activity. A growing set of features makes the solution more appealing, especially as enterprises look to consolidate security vendors.
But agentic AI poses a threat to Zscaler’s business model as well. It historically charges enterprises on a per-user basis. However, artificial intelligence agents could generate significant network traffic for just a handful of users. That’s led Zscaler to shift to a usage-based pricing model.
The company is gaining momentum with the new model, which accounted for over 30% of new annualized contract value in the third quarter. Total contract value for non-seat-based solutions climbed more than 100% year over year. The potential for usage-based pricing is huge as AI agents generate increasing traffic over time. However, investors will have to be patient, as this represents a major transition for the business.
As a result, Zscaler looks positioned to ultimately reaccelerate revenue growth after a slowdown in 2027. That makes its current stock price of 6.5 times revenue expectations look like an incredible opportunity for investors willing to be patient.
