Crowdstrike Stock Retraces, As Earnings Sober Expectations

Crowdstrike NASDAQ: CRWD continued to witness strong revenue growth during the quarter, with total revenue surging by 56%. The company had initially guided $512 million in revenue, but final revenue came in at $535 million handily beating estimates. Earnings per share also come in significantly higher at 36 cents per share, versus an estimate of 28 cents from management. The stock fell early trading after results were released.

The CEO stated the following:

“As organizations respond to macroeconomic conditions, they are prioritizing investments and looking to standardize with a security partner they can trust to achieve better protection with less time, fewer resources and lower total cost of ownership,” CrowdStrike CEO George Kurtz said in a statement.”

Crowdstrike’s management has guided that third-quarter revenue is likely to come in at around $570 million, and despite macroeconomic hurdles, the endpoint security market will continue to be robust. Endpoint security has become a crucial factor for most organizations. And a number of companies including Crowdstrike, and SentinelOne NYSE: S continue to be the front runners in the industry, and historical competitors have slowly become less and less important.

Endpoint security is witnessing a number of key trends, and Gartner has projected that 95% of the endpoint security market will eventually be cloud-based. This makes Crowdstrike among the most preferred endpoint security systems currently with the Falcon endpoint security system being the highest rated system among the various choices.  Crowdstrike also offers a whole host of security solutions for the Cloud, and considering the Cloud industry is expected to grow significantly over the next decade, this offers Crowdstrike a significant opportunity.

Crowdstrike’s sell-off after results were released can be attributed to a number of factors, the primary factor was the company continues to trade at a relatively high valuation. Despite the significant increase in revenue, the current price-to-sales stands at 27, which reflects a valuation that was more common in the last few years rather than in today’s market environment, where rates are higher, and the future is more uncertain.  The valuation reflects Crowdstrike’s current market share which stands at 16%, and considering the quality of products, many are expecting that market share is likely to increase over a period of time.

Margins for the company remain at a relatively high level with gross margins currently averaging 72% and cash flow is likely to increase significantly once the company reduces investing in growth. But valuations still remain rich and investors are clearly banking on 30-40% growth over the foreseeable future. Investors are banking on not only the significant flow of revenue from North America but other markets such as Asia, which remain relatively large in terms of potential. And the global potential is what is keeping investors committed to the stock.

Should you invest in Crowdstrike?

Currently, Crowdstrike remains in investor favor, but, valuations may have gotten ahead of themselves. The security market has a large addressable market and is expected to grow by around 9-10% over the next five years, and likely will stand at around $36 billion at the end of 2022. Considering the company’s revenue and the market cap of $43 billion, investors might be pushing the valuation to its limit.

Crowdstrike’s technicals such as the RSI-14 continue to show that the stock is neither overbought nor oversold, but the put-call ratio which stands at 0.7 shows that on average investors are all bullish on the stock. Considering the strong investor sentiment, if future earnings come in weaker, the stock could easily retrace, as we have seen with many high-flying tech stocks that have quite often fallen by 50-60% after a poor earnings report, and done so very quickly. The current price target on average by analysts stands at $241, but it is well known, that analysts are constantly on the wrong side of history. The next couple of quarters will increasingly determine whether Crowdstrike is rightly priced, until then a wait and watch approach might be prudent.