A funny thing happened to cybersecurity company Zscaler over the past week.
The company reported earnings that beat analyst expectations. Revenue came in above forecasts. The business itself did not suddenly stop functioning. Customers did not disappear overnight. The company's products did not become obsolete.
And yet the stock promptly lost roughly a third of its value. A few days later, it changed its mind. The stock rebounded dramatically, recovering much of the decline and ending up surprisingly close to where it had started.
Looking at the chart, someone who had been away from the news might assume some major event had occurred. A scandal. A data breach. A failed acquisition. A lawsuit. Instead, much of the drama revolved around guidance.
Management's outlook for future revenue came in slightly below analyst expectations. Not catastrophically below. Not "the business is broken" below. Just below. Billions of dollars in market value evaporated anyway. Then, with relatively little new information entering the picture, billions of dollars came back.
Zscaler’s daily closing price shows the sharp post-earnings selloff and the rebound that followed.
That sequence has been stuck in my head all week.
A stock falling after earnings is not unusual. Investors are not buying the past quarter. They are buying expectations about future quarters.
