CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is a good 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 shrugged off a third-quarter earnings report that would have been applauded in a stronger economy.
Contrary to popular expression, striking when the iron is cold can be beneficial.
The myopic selloff showed how impatient traders have been with technology companies in 2022. It also confirmed that even spending on essential cloud software can slow during an economic downturn. As the dust settled, CrowdStrike fell more than 60% below its all-time high from a year ago.
The global demand for protecting enterprise endpoints and cloud-based workloads is not abating – the pause button has just been hit. This has presented a great opportunity to invest in a cybersecurity leader.
Why did CrowdStrike stock go down?
On November 29, CrowdStrike announced third quarter revenue growth of 53%, including 54% growth in annual recurring revenue (ARR) derived from the company’s cloud subscription model. Both the top and bottom lines topped consensus estimates.
What the market, on the other hand, took in was the fact that new ARR did not live up to internal expectations. New subscribers came in at 1460 and new ARR was only 8% of total ARR. This was the result of customers choosing “multi-phase subscription start dates” rather than committing to a full list of CrowdStrike modules at once.
The market translated this into companies becoming less interested in purchasing CrowdStrike products. In reality, the interest is there, but rising interest rates and economic uncertainty are putting purchases on hold – especially those from small businesses.
This is what CEO George Kurtz was referring to when he cited “extended sales cycles.” Existing and potential customers aren’t scrapping plans to protect their IT infrastructure with CrowdStrike’s flagship Falcon platform, they’re just waiting for a more secure environment.
How is CrowdStrike expected to do in 2023?
Also contributing to CrowdStrike’s gap down was a fourth-quarter revenue forecast that fell well short of Wall Street expectations. Management guided for $623.7 million in Q4 revenue compared to the $634.8 million consensus.
But with the stock market notoriously a “what have you done for me lately” beast, a positive long-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 that it expects the short-term challenges to be transitory and eventually give way to healthy secular cybersecurity software trends.
For 2023, the company’s 2024 fiscal year, 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 high multiple on the surface, but nowhere near where it used to trade and reasonable given its growth history.
Is it a good time to invest in CrowdStrike stock?
In a year where growth has been difficult to achieve even for technology companies in high-growth markets, CrowdStrike has delivered brilliant financials that would normally be the envy of the sector. Abnormally high growth is only part of the story:
- CrowdStrike has beaten Street EPS estimates every quarter since it went public in June 2019 – that’s 14 out of 14 including several pandemic-challenged periods.
- Profitability is on the rise. The gross margin has increased from 55% in the financial year 2018 to 75% currently.
- Net retention rates are approaching record highs, a reflection of customers’ willingness to not only stick with, but add new software modules to their subscriptions.
- Cash flow from operations and free cash flow have reached record highs in the last quarter.
- CrowdStrike has nearly $2.5 billion in cash equivalents, plenty of money to weather even a prolonged recession.
It’s not often that a technology company gets overwhelming support from sell-side analysts in the wake of a sale. Often the dead horse is kicked while it is down. Not the case with CrowdStrike. More than 20 firms reiterated their bullish sentiment after the report; just a downgraded to a neutral stance.
Contrary to the sale, Street’s statement of confidence makes sense.
The frequency and impact of cyber attacks is trending higher. In response, companies of all sizes and across different industries are trying to adopt modern protection strategies. This will eventually 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 running on PCs, servers, virtual machines and Internet-of-Things (IoT) devices. Over half of the Fortune 500 and 15 of the top 20 US banks use CrowdStrike. Despite its traction, the company remains in the early stages of a huge global growth opportunity as more businesses realize the critical nature of cybersecurity and as new products are launched.
At this stage, the stock’s downside is likely to be a fraction of its long-term upside. This may not be the bottom, but it sure looks like a good time for growth investors to build a position.