Wall Street Just Cut This Tech Stock's Rating. History Says That's When You Buy.

Times have become difficult for the stock of cybersecurity firm Zscaler (NASDAQ: ZS) . The company, known for its zero-trust security, recently received downgrades from investment company Evercore ISI. This occurred following its earnings release for the third quarter of fiscal 2026 (ended April 30).

However, those moves also come as Zscaler stock trades at its lowest level since 2023. Amid such conditions, history shows this downgrade may ultimately be bullish, and here's why.

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Much of the negativity appears to stem from the fiscal Q3 earnings release. Investors did not react well to the projected annual recurring revenue (ARR) range of 16% to 17% for fiscal 2027, well below the 25% revenue growth in fiscal Q3.

Additionally, Zscaler revised its free cash flow margin projections for fiscal 2026 to 22.8% to 23.3%, down from the 26.5% to 27% range previously predicted. That came as the company raised its capital expenditures (capex), a metric that companies subtract from free cash flow calculations.

That news led to a 32% drop in the stock price in the following trading session. It was in that environment that Evercore analyst Peter Levine downgraded Zscaler from outperform to in-line.

In fairness, investors should probably reevaluate investments under such slowing conditions. Moreover, cybersecurity stocks like Zscaler face intense competition, making the company highly vulnerable to such slowdowns.

Nonetheless, the selling appears overdone. Zscaler stock has reached levels last seen in 2023.