FTNT - CrowdStrike: Buying Has Started Ahead Of Q2 Earnings

2023-08-22 14:00:00 ET

Summary

• My Sell thesis on CrowdStrike Holdings stock hasn't panned out as dip buyers returned to defend the $140 defense line stoutly. As such, it's apt to reassess my thesis.
• Despite concerns about increased deal scrutiny, CrowdStrike's market leadership in the EDR space is expected to increase cross-selling momentum.
• CrowdStrike's bullish thesis is expected to shift from remarkable revenue growth to significant operating leverage gains.
• Its market-leading Falcon platform is expected to underpin the momentum in its cross-modular adoption, driving earnings growth moving ahead.
• I make the case why I have decided to upgrade my rating on CRWD as buyers have started accumulating ahead of its upcoming earnings.

Leading endpoint security leader CrowdStrike Holdings, Inc. ( CRWD ) will report its fiscal second-quarter or FQ2 earnings on August 30. I last tagged CRWD with a Sell rating as I anticipated sellers to overwhelm it. However, CRWD's buying sentiments have remained robust, suggesting buyers attempted to hold the $140 level.

CRWD continues to trade at a premium valuation ("D-" according to Seeking Alpha Quant) compared to its peers. However, it's important to assess that premium against its best-in-class growth metrics of "A+." With the global economy not expected to fall into a deeper recession, it's possible for CRWD to hold its current consolidation zone as investors assess the company's forward outlook.

Recent checks conducted by Barclays ( BCS ) suggest positive momentum is anticipated, supported by a "strong pipeline of deals involving eight or more modules." As such, CrowdStrike's market leadership in the EDR space is expected to increase the cross-selling momentum as customers increase their modules' adoption cadence.

Despite that, recent results from Fortinet ( FTNT ), Palo Alto Networks ( PANW ), and Cloudflare ( NET ) suggest that increased deal scrutiny remains a concern. Notwithstanding the near-term headwinds predicated on uncertain macroeconomic conditions, Cloudflare management highlighted that its sales cycle had improved further compared to CQ1. As such, I believe investors are likely heading into CrowdStrike's upcoming FQ2 release with cautious optimism.

CrowdStrike is expected to post revenue growth of 35.4% in FQ2, down from FQ1's 42%. However, I believe investors' focus will likely shift to underlying operating leverage gains, as it's not reasonable to expect consistent +40% growth moving forward. Accordingly, the revised analysts' estimates suggest that CrowdStrike is projected to deliver full-year FY24 (calendar year ending January 2024) revenue growth of 35%.

Despite that, CrowdStrike's adjusted EBITDA growth is expected to remain robust, with full-year growth expected to reach about 46%. Therefore, CrowdStrike must continue executing well against an uncertain macro backdrop to justify its growth premium.

Recent updates by the company indicate that I could have underestimated the underlying strength of CrowdStrike's Falcon platform. The company has continued to win plaudits, as it was rated a " Leader in The Forrester Wave™: External Threat Intelligence Services Providers, Q3 2023." As such, it has strengthened its leading position in threat intelligence, further improving the advantages of the Falcon platform.

Accordingly, CrowdStrike highlighted that the platform is "built on the foundation of robust threat intelligence." Therefore, as new threats are uncovered, "the intelligence is integrated back into the platform, enhancing its breach prevention capabilities." As such, its market leadership has given CrowdStrike significant leverage against its peers, which is expected to be strengthened further as it collects more intelligence.

CrowdStrike's above-market growth estimates and higher-modular adoption cadence should provide significant impetus to drive underlying operating leverage. Recent buyers in CRWD have also rejected the pessimism embedded in my previous Sell rating. As such, I believe it's timely for me to reassess CRWD's buying sentiments to ascertain whether a revision is justified.

CRWD formed a distinct rejection at its early August highs, aligning with the recent more cautious stance in cybersecurity stocks, given Fortinet's earnings scorecard.

However, dip buyers returned to defend the $140 level, which witnessed robust support in early July. If Buyers could hold this defense line robustly, CRWD could recover its medium-term uptrend bias, suggesting it's unlikely to fall back toward its May lows.

While still early as the company heads toward its earnings release, I believe the near-term pessimism is likely priced in unless management delivers a significantly revised guidance to disappoint investors.

With that in mind, I believe it's time to turn more optimistic about CRWD as I upgrade my thesis.

Rating: Upgraded to Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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