Crowdstrike Is Still A Buy, But Be Careful

By any measure, shares of Silicon Valley cybersecurity company Crowdstrike (NASDAQ: CRWD) have had a marvelous six months or so. They’ve rallied more than 350% since the dark days of Q1 and have been printing all-time highs on an almost weekly basis this summer.

In recent years the company has made a name for itself by assisting the US government and Department of Justice with several high profile cybercrime investigations. But it took the coronavirus pandemic and the accelerated growth in the work-from-home economy to really light a fire under their shares. With cloud computing now more popular than ever, so too is cloud computing security.

Double Digit Growth

The company’s Q1 earnings in June gave investors a taste of the opportunity at hand if they didn’t already know it. Revenue was up 85% year on year which helped shares jump to their highest levels since August 2019. This was fuel enough for a summer long rally that has gained serious steam in the last three weeks alone. As other work-from-home related stocks like Salesforce (NYSE: CRM) and Zoom Video (NASDAQ: ZM) had crushed their earnings, expectations have grown for Crowdstrike to do the same and so up shares have run.

And herein lies one of the biggest risks to tech stocks after the best August since the 1980s; you need the quarterly numbers to justify the recent and future performance. Even if on paper the earnings are good, they can easily be not good enough and Wall Street can forget all the promise and potential a stock once had.

To that end, Crowdstrike released their Q2 earnings after Wednesday’s bell and it looks as if they’ve come in a little short. Even though Q2’s revenue growth was up another 84% year on year, shares traded down 7% in after hours and were still trading down over 10% in Thursday’s pre-market session.

The bulls are sure to be scratching their heads on this one as not only did the company report profitable Non-GAAP EPS, when the street was expecting a small loss, but management was also confident enough to raise its FY21 revenue outlook well beyond the consensus.

Huge Potential Remains

Despite the market’s reaction, management was understandably positive with CEO George Kurtz striking a bullish tone and outlook in the release on top of the raised guidance. “Crowdstrike's strong momentum continued into the second quarter with net new ARR reaching a new record and exceeding $100 million” he said. “A favorable competitive environment and strong secular tailwinds are fueling our growth. Organizations are shedding outdated systems and accelerating their move to modern cloud-native technologies to meet the demands of today's threat landscape.”

The future is undoubtedly bright for the company but it’s possible shares got a little ahead of themselves in recent weeks and if they did, they’re not alone. The more cautious traders have been pointing to the VIX, Wall Street’s fear gauge, which has jumped 30% in the past week even as the S&P 500 and NASDAQ indices hit new highs. If some weakness, profit-taking, or a general risk-off sentiment creeps into the markets in the coming weeks, we can expect some of tech’s high flyers to be among those getting haircuts.

Depending on how Crowdstrike shares see out this week and next, we could be looking at a textbook, ‘buy the rumor, sell the news’ situation. With its RSI above 80, indicating overbought conditions, near term volatility is almost a given. If it is, all the better for those of us still on the sidelines because Crowdstrike is a great stock, posting close to triple-digit percentage revenue growth and is only going one direction in the long term.