CrowdStrike Selloff: It's Time For Investors to Strike

Key Points

• The CrowdStrike selloff is a prime example of what can happen when the herd mentality turns bearish.
• On November 29th, CrowdStrike announced third quarter revenue growth of 53%.
• For 2023, CrowdStrike is forecast to produce 33% EPS growth to around $2.00.
• More than 20 firms reiterated their bullish sentiment after the company's third quarter report.

CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is a prime example of what can happen when the herd mentality turns bearish. The cybersecurity stock fell to a 52-week low last week as the market slammed a third quarter earnings report that would’ve been applauded in a stronger economy.

Contrary to the popular expression, it can be beneficial to strike when the iron is cold.

The nearsighted selloff showed just how impatient traders have been with technology companies in 2022. It also confirmed that even spending on must-have cloud software can slow during an economic downturn. As the dust settled, CrowdStrike slumped more than 60% below its all-time high from a year ago. 

Global demand for the protection of enterprise endpoints and cloud-based workloads isn’t slumping — the pause button has merely been hit. This has presented a great opportunity to invest in a cybersecurity leader. 

Why Did CrowdStrike Stock Go Down?

On November 29th, CrowdStrike announced third-quarter revenue growth of 53% including 54% growth in the annual recurring revenue (ARR) that stems from the company’s cloud subscription model. Both top and bottom line handily topped consensus estimates.

What the market honed in on, however, was the fact that new ARR fell short of internal expectations. New subscribers came in at 1,460 and new ARR accounted for only 8% of total ARR. This was the result of customers opting for “multi-phase subscription start dates” rather than committing to a full slate of CrowdStrike modules at once.

The market translated this to mean enterprises are becoming less interested in buying CrowdStrike products. In reality, the interest is there, but rising interest rates and economic uncertainty are putting purchases on hold — especially those by small businesses.

This is what CEO George Kurtz was referring to when he cited “elongated sales cycles.” Existing and prospective customers aren’t squashing plans to protect their IT infrastructure with CrowdStrike’s flagship Falcon platform, they’re just waiting for a more certain environment.

How is CrowdStrike Expected to Do in 2023?

What also contributed to CrowdStrike’s gap down was a fourth-quarter revenue forecast that fell well short of Wall Street’s expectations. Management guided to $623.7 million in Q4 revenue compared to the $634.8 million consensus. 

Yet with the stock market notoriously a ‘what have you done for me lately’ animal, a positive longer term outlook was all but ignored. Despite the economic headwinds, the company reiterated its full-year revenue guidance and raised its full-year adjusted EPS forecast. This suggests it anticipates the near-term challenges to be transitory and ultimately lend way to healthy secular cybersecurity software trends.

For 2023, the company’s fiscal 2024, CrowdStrike is forecast to produce 33% EPS growth to around $2.00. This means the stock now trades at 62x next year’s earnings — a lofty multiple on the surface, but nowhere near where it used to trade and reasonable given the growth history.

Is it a Good Time to Invest in CrowdStrike Stock?

In a year in which growth has been tough to come by even for tech businesses in high-growth markets, CrowdStrike has delivered stellar financials that would normally be the envy of the sector. Abnormally high growth is just part of the story:

• CrowdStrike has beaten Street EPS estimates every quarter since it went public in June 2019 — that’s 14 for 14 including several pandemic-challenged periods.
• Profitability is on the rise. The gross margin has expanded from 55% in fiscal 2018 to 75% currently.  
• Net retention rates are trending near record highs, a reflection of customers’ willingness to not only stick around but to add new software modules to their subscriptions.
• Cash flow from operations and free cash flow hit record highs in the recent quarter.
• CrowdStrike has almost $2.5 billion in cash equivalents, plenty of money to weather even a prolonged recession.

It’s not often that a tech company gets overwhelming support from sell-side analysts in the wake of a selloff. Often the dead horse gets kicked while it's down. Not the case with CrowdStrike. More than 20 firms reiterated their bullish sentiment after the report; only one downgraded to a neutral stance.

Unlike the selloff, the Street’s vote of confidence makes sense. 

The frequency and impact of cyberattacks are trending higher. In response, enterprises of all sizes and across various industries are scrambling to adopt modern protection strategies. This will ultimately lead to more and more spending on reputable solutions such as those offered by CrowdStrike. 

CrowdStrike’s AI-powered platform detects threats and stops breaches against workloads that run on PCs, servers, virtual machines and Internet-of-Things (IoT) devices. Over half of the Fortune 500 and 15 of the top 20 U.S. banks use CrowdStrike. Despite the traction, the company is still in the early stages of a huge global growth opportunity as more enterprises realize the critical nature of cybersecurity and as new products are launched. 

At this stage, the stock’s downside is likely a fraction of the long-term upside. This may not be the bottom, but it’s sure looking like a good time for growth investors to build a position.