Our cyber stocks are falling on a rival’s earnings blowup. Why it’s not a cause for concern
Palo Alto Networks and CrowdStrike on Wednesday are falling in reaction to cybersecurity peer ZScaler’s earnings debacle the prior evening. The market has recently become more discerning in differentiating AI winners and losers in the software space. The question for us: Do the results at ZScaler mean that the market was wrong in anointing Club names Palo Alto Networks and CrowdStrike winners? Palo Alto entered Wednesday up over 60% since the start of April. CrowdStrike’s gains are even more eye-popping, up 72%. ZScaler, a cloud-native provider of network security, reported decent numbers for its fiscal 2026 third-quarter on Tuesday night. The issue, as it so often is with earnings, was the company’s outlook. It guided for sales below expectations for the current quarter and into the next fiscal year, where it expects revenue to grow 16% to 17% versus the 19.5% FactSet consensus. Zscaler is still growing the top line, but obviously not as fast as Wall Street would like. Making matters worse, Zscaler lowered its free cash flow guide for the rest of this fiscal year due to increased capital expenditures. Wall Street is hypersensitive to cash flows these days given the arms race to invest in artificial intelligence. Many companies are opening up their check books for AI, but there’s uncertainty on which companies will use that spending to actually innovate and produce returns, and which will get disrupted by the new technology. The result is a stock down 30% on Wednesday morning. Shares of Zscaler had rallied about 32% since the start of April. So, it’s been hot but not as hot as Palo Alto and CrowdStrike, which are down almost 4% and 3%, respectively, on Wednesday. Given the even larger run in our two cyber names, it’s easy to see why some investors want to book some profits in sympathy with ZScaler. That’s of course even more true if you think the issues at ZScaler foreshadow bad quarters from the rest of the cyber cohort. However, ZScaler isn’t in the same league as Palo Alto and CrowdStrike, and it’s almost certainly not right to think that the issues holding back ZScaler apply to either of our two best-in-class cybersecurity plays. For starters, ZScaler’s problems may well be the result of those two are winning all the business as the historically fragmented cybersecurity industry trends toward vendor consolidation. Furthermore, the company got dinged on news that two senior sales executives were leaving. You’ll never guess where one of them has gone, according to LinkedIn: CrowdStrike. Indeed early Wednesday morning, Wedbush analyst Dan Ives came out in defense of Palo Alto and CrowdStrike, raising his price targets to $300 and $700, respectively. In a note to clients, Ives argued the poor guidance from ZScaler is the result of “company specific execution issues and not an indicator of broader sector issues.” These names are still up a lot year to date and a whole lot more from the late February lows, when they dragged down by fears that AI would disrupt all software companies. We’ve consistently argued that those concerns were misguided, and that AI would make cybersecurity even more indispensable. We bought more CrowdStrike into this weakness in late March. Thankfully, the market has come around to our view and the stocks have roared back to new all-time highs. Because the moves entered parabolic territory, we have booked profits in both names within the past month — most recently in CrowdStrike at the start of last week . Our discipline is to trim stocks after massive moves in a short period of time to ensure we don’t squander those gains. We know we can’t identify the exact top and sometimes the runs will continue. That is what happened with our Palo Alto trim last month and with last week’s CrowdStrike sales. This means if you haven’t trimmed any yet, you’re still looking at higher prices than we got, even with Wednesday’s declines. The bottom line? If you haven’t booked any profits, it’s not too late but don’t think the story has changed based simply on what ZScaler said. We continue to think that cyber will drive an increase in demand for cybersecurity offerings and that CrowdStrike and Palo Alto Network are the best ways to play this long-term trend. If you only want to own one, CrowdStrike is our preference thanks to its more cloud-native offering. (Jim Cramer’s Charitable Trust is long PANW and CRWD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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