The Week Zscaler Lost 30% and Then Changed Its Mind

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.

The Strange Thing Wasn't the Drop

A stock falling after earnings is not unusual. Investors are not buying the past quarter. They are buying expectations about future quarters.

If investors conclude that growth is slowing, even slightly, a stock can fall sharply. Perhaps expectations had become too optimistic. Perhaps the valuation had become stretched. Perhaps investors were simply reassessing how much they were willing to pay for future growth.

All of those explanations are reasonable. The market is under no obligation to reward a company merely because it exceeded estimates.

What fascinates me is not that the stock fell. What fascinates me is what happened next.

The Strange Thing Was the Recovery

Suppose I had asked someone immediately after the earnings call why the stock was down so much. They might have told me that investors had finally recognized serious problems with the company's growth trajectory.

A fair argument.

Now suppose I asked the same person a few days later why the stock had recovered so much. What fundamentally changed?

The company was still the same company. The earnings report was still the same earnings report. The guidance was still the same guidance.

There were analyst notes, television appearances, interviews, and countless opinions floating around financial media. But there was no equivalent earth-shattering piece of new information.

And yet the price moved dramatically.

It is hard to avoid the conclusion that a significant portion of the movement reflected changing sentiment rather than changing facts.

Markets Are Pricing Stories About the Future

One of the most interesting aspects of the stock market is that it is not really pricing companies. It is pricing expectations.

Those are not the same thing.

A stock price is not a direct measurement of value in the way a thermometer measures temperature. It is a constantly changing estimate of what thousands or millions of people believe the future might look like.

When uncertainty is high, even small changes in narrative can create enormous changes in price. Investors hear that growth may slow slightly. Some imagine a temporary pause. Others imagine the beginning of a long decline.

Both groups are looking at the same information. They are simply telling themselves different stories about the future. The stock price becomes the battleground where those stories compete.

Could You Profit From Something Like This?

The chart makes it look easy. Buy during the panic. Sell during the recovery. Collect the difference.

Except it never feels simple in real time.

When a stock is falling 30%, nobody knows whether it is approaching the bottom or merely passing through it on the way to an even larger decline. Every investor who successfully buys a panic is taking a risk that the panic might actually be justified.

The opportunity exists because the uncertainty exists. If everyone knew the stock would recover next week, it would not be trading at a discount today.

That realization has made me increasingly skeptical of the idea that swing trading is easy money. The opportunities are real. The uncertainty is real too. One cannot exist without the other.

My Own Position

For full disclosure, I own shares of Zscaler. I held them through the decline.

Watching a stock move that dramatically in such a short period of time is a useful reminder that markets are driven by human beings, not equations. Humans become excited. Humans become fearful. Humans overreact. Sometimes they overreact in both directions within the same week.

As the stock approaches my cost basis again, I find myself thinking less about whether I was right or wrong and more about what the experience reveals.

The lesson I keep coming back to is that markets contain both information and emotion. The difficult part is determining where one ends and the other begins.

And if there is a reliable way to do that, the people who know it are probably not talking.