Zscaler (ZS.US) hits record drop of over 30%: market fear of "AI disrupting software" outweighs performance.

The leading cybersecurity technology company Zscaler (ZS.US) saw its stock price plunge by over 30% on Wednesday, marking the worst single-day performance in the company's history. This was due to the company's disappointing forward-looking guidance released earlier, which overshadowed the positive impact of better-than-expected third-quarter earnings and highlighted the market's fear and pessimism regarding the "AI disrupts everything" narrative surpassing performance growth trajectory. Zscaler's future outlook fell below the consensus expectations of Wall Street analysts, undoubtedly causing even more concern among investors who have been anxious since the "AI disrupts everything" narrative was ignited by Anthropic in February. The latest forecast data from this cybersecurity company indicates that annual recurring revenue (ARR) for the 2027 fiscal year is expected to increase by 16% to 17% year-over-year, lower than the consensus expectations of Wall Street analysts. For the current quarter, Zscaler expects revenue to be in the range of approximately $875 million to $878 million, slightly lower than the analysts' consensus expectation of $878.6 million compiled by FactSet. Zscaler's stock price plunged by 31% in a single day, as software stocks face backlash from the narrative of "AI disrupting" again. Zscaler is a cloud-native cybersecurity company based in San Jose, California, with a core focus on being a "Zero Trust Security Platform" provider. Its basic concept is that after the prevalence of cloud computing, remote work, and software-as-a-service applications, enterprises should no longer automatically trust their internal networks and should instead authenticate every user, device, application, and data access through a cloud security platform for identity verification, policy checks, threat detection, and data protection. The company refers to this architecture as the Zero Trust Exchange platform and emphasizes its coverage of various access scenarios such as users, workloads, branch offices, and devices. Zscaler forecasts an annual recurring revenue range for the 2026 fiscal year of $3.74 billion to $3.75 billion, indicating a potential 24% year-over-year growth. The company stated that it lost two sales business leaders this quarter, and CFO Kevin Rubin stated that the company is taking a "cautious approach" to performance guidance during these transition periods. The company also mentioned that the shortage and price increase of memory chips/components, as well as rising operating costs, will result in a 200 basis point increase in capital expenditures as a percentage of revenue for the 2027 fiscal year. Zscaler CEO Jay Chaudhry stated in a media interview on Wednesday, "We have taken a disciplined approach in our forecasts, but we see tremendous growth opportunities." "The launch of Mythos by Anthropic is playing a significant role and further fueling it, as the demand for network security in the market has never been greater." Zscaler is one of the cybersecurity companies collaborating with Anthropic to conduct Project Glasswing, which aims to test the capabilities and architecture flaws of models before they are publicly released. However, since February of this year, investors' sentiment towards software stocks has significantly deteriorated due to concerns that artificial intelligence will disrupt the subscription-based traditional business model of software companies. Cybersecurity stocks have also been heavily impacted by this pessimistic narrative of "AI disrupting everything," but the rise in network threats driven by large-scale AI models is increasing the confidence of some investors who are more optimistic about the growth prospects of the cybersecurity sector and are betting on companies increasing spending to enhance their cybersecurity defenses. The current market is revaluating AI intelligent entities like Claude Cowork and OpenClaw (formerly known as Clawdbot, Moltbot) from "software productivity tools" to "disruptors of the traditional software SaaS business model + amplifiers of semiconductor capital spending." This is why the 13F data tracking from Goldman Sachs Group, Inc. shows rare consensus among American hedge funds and large mutual funds in the first quarter significant selling of software stocks and inflow into semiconductors, pushing the semiconductor long position to historical highs. The 13F data tracked by Goldman Sachs Group, Inc. shows that institutions are significantly reducing their software exposure and increasing their semiconductor exposure: hedge funds' semiconductor long position is at a record high, while their software position is at the lowest since 2019; mutual funds' software position is at the lowest since 2012, and after excluding Microsoft Corporation, mutual funds' relative over-allocation of software to semiconductors is also at the highest since 2012. In other words, funds are shifting from the "application layer that may be restructured by AI agents" to the "computational infrastructure foundation that AI agents must rely on." In the past year, Zscaler's market value has halved. Despite the lackluster outlook, Zscaler's third-quarter earnings report exceeded expectations, with adjusted earnings per share of $1.08 and revenue of $8.50 billion. Analysts had previously expected adjusted earnings per share of $1.01 and revenue of approximately $8.35 billion, so the quarter's core performance exceeded the consensus expectations of Wall Street analysts. The panic of "AI disrupting everything" has spread throughout the software industry! The surge in valuation behind Anthropic is the revaluation of the software application layer in the era of intelligent entities However, for Zscaler, which was previously priced by the market as a high-growth cybersecurity software stock, what investors are truly punishing is not the quarterly performance but the continuous downward revision of its growth curve under the pessimistic narrative logic of "AI disrupting everything" ignited by leaders like Anthropic. After the release of the earnings report, the well-known Wall Street investment firm Evercore ISI downgraded its stock rating on Zscaler from "outperform" to "in line with the market" and significantly reduced the target price, citing weak outlook for the 2027 fiscal year, unexpected leadership adjustments, and potential business disruptions. They wrote, "We expect the stock to remain range-bound for the next few quarters and continue to fall out of favor as the company navigates through these changes." Zscaler's record single-day stock price plunge is closely related to the pessimistic narrative of "AI disrupting everything," but it is not simply "AI replacing Zscaler." More accurately, artificial intelligence has created two opposing forces: on one hand, AI agents, automated vulnerability detection, model-generated attack codes, increasing enterprises' demand for zero trust, data security, application isolation, and vulnerability defense; Project Glasswing by Anthropic indicates that advanced models can now discover and exploit software vulnerabilities with capabilities close to top human security researchers, in which Zscaler is also involved. On the other hand, investors are concerned that artificial intelligence will compress traditional software seat models, increase infrastructure costs, and repackage security capabilities through large cloud providers, model companies, or platform manufacturers. Zscaler is caught in this dilemma: in the long run, it is positioned in the race for the rising demand for AI security; in the short term, slowing growth rate, sales turnover, and rising capital expenditures are preventing the market from continuing to give it a high valuation premium as the "AI-driven cybersecurity leader." Enterprises' urgent need to improve efficiency and reduce operating costs has significantly promoted the two core categories of AI application software in recent times generative AI applications and the widespread application of AI intelligent entities. Among them, AI intelligent entities (or AI agents) autonomously performing various tedious and complex tasks are highly likely to be the ultimate trend for AI applications in the next decade. The emergence of AI intelligent entities signifies that artificial intelligence is transitioning from an information support tool to a highly intelligent productivity tool; this is why Anthropic's valuation skyrocketed to $1 trillion and eventually surpassed OpenAI. The AI intelligent tools launched by Anthropic can be seen as a significant catalyst for the panic selling of software stocks since February; however, more accurately, it is not that Anthropic "singly disrupts the entire software stock market," but its Claude agent-based AI tools made the market suddenly realize that large model companies are fundamentally disrupting the enterprise application layer from the "bottom-up model supplier," possibly eroding profits for traditional SaaS software companies focusing on various niches such as legal, sales, marketing, data analysis, cybersecurity tools, low-code editing, and more. Additionally, the growing cost of AI data centers is also eating into software free cash flow. Zscaler explicitly stated that rising pressures in memory components, storage chips, and central processors' prices and supplies have prompted the company to advance purchase data center equipment to lock in current prices and avoid future price hikes; this will bring forward some investments originally planned for the 2027 fiscal year to the fourth quarter and increase the capital expenditure as a percentage of revenue for the 2026 fiscal year from the previously expected mid-single digits to high single digits, potentially increasing by about 200 basis points for the 2027 fiscal year compared to the 2026 fiscal year.