CrowdStrike earnings and revenue beat forecasts, stock falls

-CrowdStrike’s revenue in the first quarter increased 62% Y-o-Y to $1.92 billion, of which $192 million was new ARR revenue. Non-GAAP earnings per share came in at 31 cents per share, versus an expected 21 cents per share by analysts.

-GAAP net income loss came in at $23.9 million for the year.

-1620 new subscriptions were added, bringing total subscriptions to 17,800.

-The stock fell as the ARR outlook has made investors think twice about Crowdstrike’s valuation

CrowdStrike NASDAQ: CRWD posted better than expected revenue and earnings after-hours on the 2nd of June. Management also cited an improved outlook for the year, raising their forecasts for the second quarter to $516 million, and revenue for the year is expected to come in at $2.2 billion. The stock is currently down 45% off its 52-week high.

Why did the stock fall despite the beat?

CrowdStrike continues to post strong results, and the software security industry continues to remain robust despite economic headwinds. Regardless, investors are worried that ARR (annual recurring revenue), might be affected due to a slowdown in the economy and a pullback in capital expenditure from customers.

Is the reaction justified?

Historically security-related capital expenditure in the tech industry continues to remain robust, even during economic downturns. Furthermore, CrowdStrike remains the most sought-after endpoint security provider and continues to be the top-rated choice among its competitors.

Management also reiterated that its platform received record bookings across its cloud services and a 100% increase in ARR for its emerging products group, which includes Discover Spotlight, Identity Protection, and Log Management module.  One of CrowdStrike’s biggest customers posted the following on Linkedin, "CrowdStrike's Complete team allows our team to focus on the bigger picture without sacrificing the quality and detail of tier 1 response."  The end-to-end service that the company provides has allowed it to differentiate itself from its customers, including legacy competitors such as Blackberry/Cylance and newer competitors such as SentinelOne.

What stands out is the valuation, the tech industry, in general, has witnessed valuations pull back as economic slowdown and rising interest rates weigh on the market. CrowdStrike continues to trade at 21x earnings, which is steep under most circumstances. Despite revenue continuing to expand at a rapid pace, investor risk appetite has clearly waned. Clearly, risk-off sentiment is weighing on valuation, this could provide an entry opportunity to investors.

CrowdStrike’s potential remains robust:

The endpoint security TAM (total addressable market) is around $14 billion USD currently to around $25 billion by 2028, growing at about 9% per year.  The most important point is that CrowdStrike, at the end of 2019 was in 4th place with a 9% market share in the endpoint security industry that number has now grown to 15% putting CrowdStrike in first place, in terms of market share.  Furthermore, CrowdStrike continues to expand globally and is increasingly picking up customers in key markets such as Asia, and has teamed up with Ernst & Young, to provide end-to-end service for businesses in the region. Geographical expansion combined with strong vendor support is likely to result in growth being on a strong footing for the year. It should also be noted that Crowdstrike has one of the highest retention rates of customers within the endpoint security market.

Management’s outlook:

Management has projected that the company will continue to witness strong growth into the next few quarters, and has guided that the annual revenue should come in higher than previously projected. Crowdstrike continues to explore key markets such as e-commerce, and once the platform responsible for the e-commerce industry is implemented, growth is likely to further increase. Management has also re-iterated that it will spend a record amount of capital expenditure to expand CrowdStrike’s technologies and geographies, which would further ensure growth remains robust.

CrowdStrike’s margin growth, free cash flow, and valuation:

CrowdStrike currently has a gross margin of around 79%; management expects that number to increase to 80% over the coming quarters.  Operating margin during the quarter grew to 17% and operating revenue came in at $83 million. The company is likely to turn a profit in the finals quarters, as the costs structures reduce. Meanwhile, free cash flow grew 34% Y-o-Y to $157 million.

Moving into the next quarter CrowdStrike expects EPS to come in around 27 cents per share, and for the year, earnings per share could come in anywhere from  $1.3 to $1.5 on a GAAP basis. That would translate into a forward price-to-earnings of around 114x.

Investors continue to be circumspect about the tech industry. With the broader tech industry witnessing rapid correction on any negative sentiment, CrowdStrike could remain under pressure for a couple of quarters as it moves towards posting a post net profit on a regular basis.