AI financing jitters are hammering cybersecurity stocks far harder than the broader Nasdaq, leaving investors to wonder whether the sector’s demand story can survive the selloff or whether the AI trade just entered its painful second half.
Cybersecurity stocks are giving back ground as concerns about how AI spending gets funded spread across technology. In afternoon trading, Palo Alto Networks (NASDAQ:PANW | PANW Price Prediction) stock is down 7%, trading at $343.31. Meanwhile, SentinelOne (NYSE:S) stock is sliding even harder, down 9% to $21.29.
Zscaler (NASDAQ:ZS) stock is down 6% to $206.39, a milder drop than Palo Alto stock and SentinelOne stock are posting. Despite the shared selloff, the businesses differ: Palo Alto sells firewalls and a broad platform of security software, while SentinelOne sells endpoint protection and Zscaler sells cloud-delivered secure network access.
The selling extends across the wider cybersecurity basket, as the First Trust NASDAQ Cybersecurity ETF (NASDAQ:CIBR) is down 4%. Large-cap tech is holding up better; the Invesco QQQ Trust (NASDAQ:QQQ) is down 1.72%. That leaves Palo Alto stock, SentinelOne stock and Zscaler stock falling harder than the cybersecurity fund, which is sliding far more than the NASDAQ 100 tracker.
AI Financing Questions Weigh on Cybersecurity Stocks
The decline in Palo Alto stock extends a pullback in cybersecurity stocks from record highs set earlier this month. A broad technology selloff and questions about how AI spending gets funded are weighing on the sector. It’s a sharp reversal. Palo Alto stock, SentinelOne stock and Zscaler stock are caught in this reversal after the companies’ recent sales pitches leaned heavily on zero trust, agentic AI security and AI-driven security operations.
On Thursday, Citi raised its price target on Palo Alto stock and kept its Buy rating. Citi’s analysts stated that the firm’s chief information officer survey showed improving security spending, with AI deployments driving additional investment. Even that price target raise hasn’t kept Palo Alto stock from sliding with the rest of the sector.
Palo Alto’s own results have backed that demand story. In fiscal Q4 2026, Palo Alto grew revenue 34.5% year over year to $3.41 billion, while its Next-Generation Security annual recurring revenue jumped 63% to $9.1 billion. Nikesh Arora was Palo Alto’s chief executive at the time. He stated in the results release: “The latest advancements in AI are elevating cybersecurity to the top of the CIO priority list.”
Beyond firewalls, Palo Alto’s platform covers cloud security, the Cortex security operations suite, AI security and the Idira identity business. Console, an AI-native platform for agentic workflows, is Palo Alto’s latest acquisition aimed at expanding Cortex. At Palo Alto, remaining performance obligations rose 34% to $21.2 billion in Q4.
Demand Story Collides With a Marked-Down AI Trade
For Palo Alto, the bull case rests on security spending that Citi describes as improving while companies deploy AI, which could keep customers consolidating onto its platform. Management’s fiscal 2027 outlook calls for Palo Alto revenue of $14.1 billion to $14.2 billion, or growth of 23% to 24%. However, the risk for Palo Alto is that cybersecurity stocks are being marked down with the rest of the AI trade despite that demand.
As of June 30, Palo Alto stock was the First Trust fund’s largest disclosed holding. SentinelOne and Zscaler shares were also among its positions, alongside the maker of the FortiGate firewall lineup.
Cybersecurity Rally Faces a Major Test
Palo Alto’s next quarterly report could show whether the AI-driven security demand Citi described holds up, and traders can watch for whether the CIBR First Trust fund keeps sliding faster than the Invesco QQQ Trust.
What remains uncertain for SentinelOne stock and Zscaler stock is the direction of the broader AI trade. SentinelOne markets AI security tools such as Purple AI and Prompt Security, while Zscaler presents zero trust as the architecture for securing agentic AI workloads (riding an AI rally has two halves, the entry and the exit, both of which we covered in a free handbook). Investors should consider keeping their position sizes modest in these cybersecurity stocks until the AI financing question finds a resolution.
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