Zscaler, GitLab Downgraded on AI Disruption Fears
BTIG cuts Zscaler to Neutral, removes it from Top Picks. Guggenheim downgrades GitLab citing AI risk. The SaaS selloff finds new victims.
The SaaS selloff is spreading to cybersecurity.
BTIG downgraded Zscaler to Neutral from Buy this week, removing the stock from its first-half Top Picks list without setting a price target. The move reflects growing concern that AI-driven disruption isn't limited to traditional software—it's coming for security vendors too.
Separately, Guggenheim cut GitLab to Neutral from Buy, citing "more pronounced" AI risk and a lack of near-term catalysts. The DevOps platform faces questions about whether AI coding assistants will reduce demand for its collaboration tools.
Both downgrades reinforce the theme we explored in our SaaS bear market analysis last week: the per-seat licensing model that built these companies is under pressure.
Zscaler's Problem
Zscaler pioneered cloud-native security, replacing legacy hardware with a zero-trust architecture delivered as a service. The pitch worked—revenue grew from $302 million in fiscal 2019 to over $2 billion today. But the stock has given back much of its gains.
BTIG's concern isn't about Zscaler's current business. It's about what happens when AI agents handle network security decisions that humans currently make. If enterprises can automate threat detection and response, they need fewer security seats. Zscaler's pricing power erodes.
| Metric | Zscaler | GitLab |
|---|---|---|
| YTD Performance | -34% | -41% |
| Forward P/E | 52x | 68x |
| Revenue Growth (LTM) | 31% | 27% |
| Key Risk | AI automation of security ops | AI coding reduces collaboration needs |
GitLab's AI Exposure
GitLab faces a different but related challenge. The company built a complete DevOps platform—source control, CI/CD, security scanning, project management. Developers pay per seat to access the toolchain.
But AI coding assistants like GitHub Copilot and Claude are changing how developers work. If AI can write, review, and debug code with less human involvement, teams shrink. Fewer developers mean fewer GitLab seats.
Guggenheim flagged this as "more pronounced" risk compared to other software names. GitLab's entire value proposition assumes human developers collaborating on code. That assumption is getting stress-tested.
The Broader Trend
These downgrades aren't isolated. The iShares Expanded Tech-Software ETF (IGV) is down over 21% year-to-date. Names across the sector—ServiceNow, Workday, Salesforce—have repriced lower on AI disruption fears.
The market is working through a difficult question: which software companies benefit from AI, and which get displaced by it? The answer isn't obvious. Microsoft and Google have AI tailwinds. Pure-play SaaS vendors face headwinds.
For cybersecurity specifically, the debate is nuanced. AI creates new attack vectors that require sophisticated defenses. But AI also enables automated defense that could reduce demand for security staff and their software licenses. Both dynamics are real.
Trading Implications
Zscaler and GitLab aren't cheap even after the selloff. Both trade at elevated multiples relative to growth. If AI disruption risk is real—and the analyst community increasingly thinks it is—valuations have further to fall.
That said, timing a bottom in beaten-down growth names is notoriously difficult. Some of these companies will adapt and thrive. Others will face sustained multiple compression. Picking winners requires conviction on which business models survive the AI transition.
For now, the path of least resistance is lower. Until the sector proves it can grow through AI disruption rather than get disrupted by it, sellers have the upper hand.