Will Crowdstrike Get A Boost From Increased EPS Guidance?

Key Points

• Like other techs, Crowdstrike has been slammed by higher interest rates
• The company has been using debt to grow; higher rates may hurt that strategy
• It boosted earnings and revenue guidance for Q3 and the full year 

Cybersecurity specialist Crowdstrike NASDAQ: CRWD had a terrific run in 2020 and into 2021, but along with other techs, this former growth-stock favorite has been languishing.

But much of that decline is due to interest-rate increases, along with the broader market pullback. 

What’s the longer-term potential for the stock? 

First, a little background: Crowdstrike went public at $34 in June 2019. Shares closed Thursday at $161.28, so there’s no immediate risk of Crowdstrike joining the ranks of newly public techs sinking beneath their IPO prices. (And yes, a stock that went public in 2019 is still new; in fact, companies that IPO’d in the past 10 to 15 years are very much in the running for notching big price gains in a bull market.)

Its market cap is currently $37.64 billion, behind only Palo Alto Networks NASDAQ: PANW and Fortinet NASDAQ: FTNT, when it comes to other cybersecurity names. 

It’s certainly true that cybersecurity isn’t an industry that’s likely to shrink anytime soon, but techs tend to suffer when interest rates are on the rise. That’s because techs and other growth companies tend to invest profits back into high-potential projects rather than returning money to shareholders in the form of a dividend. Higher rates can impede that ability, meaning growth prospects can slow. That’s especially damaging for stocks with high price-to-earnings ratios, which you often see with tech stocks.

Using Leverage To Grow

Crowdstrike has long-term debt of $740.261 million. It’s not unusual to see fast-moving techs use leverage to finance growth. Higher interest rates also mean increased costs of borrowing, which can also put a damper on growth. In fact, the stock skidded more than 5% this week, following the Federal Reserve’s rate hike.

There’s been good news for the company, however. On August 30, earnings for the second quarter of fiscal 2023 came in at $0.36 per share on revenue of $535.2 million. MarketBeat earnings data show that Crowdstrike has beaten revenue views every quarter since going public. It’s topped earnings views in every quarter since its first one as a public company.

Earnings have grown at triple-digit rates in each of the past eight quarters, while revenue grew at high double-digit rates.

Crowdstrike Lifted Guidance 

The company boosted its guidance for the third quarter. It now expects earnings per share in a range between $0.30 to $0.32, higher than analysts had expected. 

It guided toward revenue between $569.10 million and $575.90 million, lower than consensus estimates. Still, that would mark a significant increase over the year-earlier quarter. 

For the full year, Crowdstrike sees earnings between $1.31 and $1.33 per share, roughly double fiscal 2022’s earnings. 

Within the cybersecurity industry, Crowdstrike has some competition when it comes to price action. 

Small-Cap Cybersecurity Names

Absolute Software NASDAQ: ABST, a small cap that develops and sells software to manage and secure devices, apps, data, and networks for enterprise customers, is up 36.19% in the past three months and 17.40% year-to-date. 

This company, too, is a recent IPO, having gone public in October 2020. However, with a market cap of just $550.9 million, it’s not an institutional quality stock like Crowdstrike, Palo Alto Networks, or Fortinet. The larger owners, with the exception of funds focusing on small caps, gravitate towards larger companies that tend to be more stable and have more analyst coverage. 

Sometimes very small companies from all industries emerge as price leaders. That’s due to factors including being new and having an agile management team incentivized to pursue growth. 

Within the cybersecurity industry, Intrusion NASDAQ: INTZ is an example of that phenomenon. The stock is up 21.29% in the past three months and 30.81% so far this year. But with a market capitalization of just $86.9 million, it’s also not an institutional quality stock. 

Unless you are specifically seeking small-cap exposure, which is appropriate in many situations, you’ll generally find more stable opportunities among the larger names within an industry.