ZS - CrowdStrike Is Up 81% Since My Double-Down; Too Late To Buy Now?

2023-12-04 18:00:00 ET

Summary

• CrowdStrike stock is on a fantastic run.
• The company is riding fantastic results and charting a path to further growth.
• However, the exuberance in the stock means better opportunities to buy may come.

Cybersecurity is an area that companies must spend money on rain or shine. The direct and indirect costs of breaches, downtime, and system recovery are too great. It's an arms race between cybersecurity companies and bad actors, and CrowdStrike ( CRWD ) is building quite an arsenal.

Cybersecurity being too vital to cut is why I have been bullish on the sector, particularly CrowdStrike and Palo Alto Networks ( PANW ) in 2023. Find a terrific sector with tailwinds, then invest in the best companies.

In March, I questioned whether I was right to double down on CrowdStrike after it came down 50% from its 52-week high to trade at just $130 per share. The stock has been on a tear ever since, rising over 80%, as shown below.

It's time to take stock (pardon the pun); has the stock outrun the fundamentals?

The importance of endpoint security

IBM ( IBM ) estimates that 90% of effective cyberattacks and 70% of breaches exploit endpoints. Endpoints are any devices that connect to a network, like workstations, laptops, and cell phones.

Forrester ( FORR ) and Gartner ( IT ) both rank CrowdStrike as an endpoint protection leader, and CrowdStrike and Microsoft ( MSFT ) are doing battle to capture the largest market share. Endpoint protection is a fertile market as the world continues to increase connectivity. The trend of growing endpoints won't slow anytime soon.

CrowdStrike's Falcon platform offers a comprehensive package of security solutions other than endpoint protection as well. The company estimates that endpoint protection accounts for about 20% of its current $100 billion total addressable market.

How were CrowdStrike's earnings?

CrowdStrike bucks the trend of slowing growth because of the necessity of cybersecurity. Annual recurring revenue ((ARR)) climbed 35% in Q3FY24, smashing through the $3 billion mark, as depicted below.

Its rise is remarkable. The company is also increasing operating efficiency, growing free cash flow, and shoring up an already strong balance sheet.

Free cash flow of $655 million through Q3 is nearly equal to last fiscal year's $677 million. CrowdStrike has $3.2 billion in cash and investments to fund growth and pay for acquisitions. This is offset by just $742 million in long-term debt, consisting primarily of notes issued at favorable rates and maturing in 2029.

The business performance is fantastic.

Focusing on new frontiers

CrowdStrike built its business with massive corporations as the bedrock. As of January, it counted the majority of the Fortune 500 and Fortune 100 as customers. But the problem here is obvious - there are only so many of these ultra-rich U.S. corporations to capture. CrowdStrike is focusing on expansion to new areas like the Asia-Pacific ((APAC)) region, small and medium businesses ((SMBs)) and the public sector.

The timing is pertinent to sustaining growth and boosting the stock price - push now before growth has a chance to stall.

As we can see in the graphic, some of these markets are virtually untapped. The public sector is a terrific area to reach now that hacks of school districts and other organizations have become prevalent. A recent incident in Clark County Public Schools (covering Las Vegas, NV) affected 300,000 students and 40,000 employees.

Reaching for SMBs can also be fruitful; however, servicing oodles of small customers with more budget constraints could hurt margins.

Finally, CrowdStrike announced the opening of a new Singapore office in November. This is part of a push for APAC growth. CrowdStrike made $81 million (~10% of total sales) last quarter from this region on 36% growth. Asia is a hotbed of cybercrime, so gaining market share here will pay dividends.

All of this contributes to CrowdStrike's vision to reach $10 billion ARR within five to seven years. It will easily reach this goal if current trends in the dollar-based net retention rate ((DBNR)), which has been above 120% since 2019, continue.

Is CrowdStrike stock a good buy now?

CrowdStrike stock is still 20% off its all-time high reached during the 2021 tech stock mania peak, as shown below.

Undoubtedly, the company is much stronger now. However, this is not 2021 with zero interest rates and massive other economic stimulus.

The price-to-sales (P/S) ratio is near 20 again, as shown below, and CrowdStrike is valued higher than peers like Zscaler ( ZS ) and Palo Alto.

CrowdStrike deserves a premium over both due to its industry position, opportunity, and enviable growth. Yet it looks a bit expensive.

The Santa Claus rally could continue, and investor sentiment could reach extreme greed again, pushing the stock higher, but I am turning cautious.

Over the long term, CrowdStrike is a terrific investment. But I am looking for a better point to add to a position.

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