2023-03-09 14:35:20 ET
Summary
- CrowdStrike Holdings, Inc. reported strong growth in FQ4'23, with revenues growing 48% YoY.
- The company continues to forecast sequential growth deceleration leading towards 30% growth as FY24 ends next January.
- CrowdStrike Holdings, Inc. stock trades at over 10x FY24 sales targets, and analysts are dangerously promoting much richer valuations.
Amazingly, CrowdStrike Holdings, Inc. ( CRWD ) rallied into quarterly earnings with the stock rallying back up to $130. The cloud cybersecurity firm reported another strong quarter, but the guidance still points towards dramatically slowing growth in the year ahead. My investment thesis remains ultra-Bearish on the stock on these rallies to premium valuations knowing the trend isn’t the friend of shareholders.
Another Solid Quarter
CrowdStrike reported FQ4'23 revenues grew an impressive 48% in the quarter, but the cybersecurity firm continued a trend of sequential quarterly dips in at the growth rates. The company is watching sales growth rates dip 300 to 500 basis points on a sequential quarterly basis.
By the time FY24 ends in next January, CrowdStrike will only report quarterly sales growth in the 30% range. The cybersecurity company did nothing to alter this scenario with the latest guidance from the FQ4'23 report highlighting ongoing elongated sales cycles.
Even after another $10 million revenue beat in FQ4, the company didn’t alter guidance for FY24 much from the prior analyst estimates up at nearly $2.9 billion. In fact, the outstanding ARR only grew $222 million in the quarter for minimal sequential growth in a further sign of the slowdown ahead.
The company did produce $941 million in cash flow from operations and free cash flow of $677 million for the year. At least, CrowdStrike is a cash flow machine to offset any major downside risk.
Plan For Slowing Growth
Too many investors get caught up in the moment when a company reports nearly 50% growth. For CrowdStrike Holdings, Inc., investors have to value the company based on where growth is headed in the next year or so.
At the end of 2023, the company will struggle to produce 30% growth and will likely target a 25% growth rate for FY25. The market will value 25% growth at a far different multiple than 50% growth.
CrowdStrike is forecast to produce ~$3 billion in FY24 revenues and a 10x P/S multiple only yields a market cap of $30 billion. Based on 243 million shares outstanding, the stock value already tops $31 billion and the risk is for further multiple contraction as growth slows.
These other cybersecurity stocks trade with lower P/S multiples when growth slows into the sub-40% realm. Zscaler ( ZS ), Palo Alto Networks ( PANW ) and Fortinet ( FTNT ) trade at similar forward EV/S multiples, but the slower-growing company in the group trades at 8x EV/S, with sales growth slipping towards the lower 20% range.
While CrowdStrike could continue to beat estimates, the company only makes the hurdles tougher to top in future years. Under the clear scenario ahead for the year, the stock is already maxed out and multiple contraction is the most likely outcome, leading to a nearly 20% reduction in the stock price.
The actual major risk is that the company stumbles and doesn’t maintain a competitive advantage in the space. Every company before them ultimately runs into such a scenario as revenues scale into the billions.
The dangerous part to investors is that analysts aren't preparing clients for the slowing growth phase ahead. Even some of the more bearish analysts raised price targets to $155 in the case of J.P. Morgan and $145 from Wedbush Securities.
Despite a clearly stretched valuation for CrowdStrike, the average analyst predicts a price target of $161. At this price, the cybersecurity specialist would have a market cap of $39 billion, or 13x FY24 sales targets.
Takeaway
The key investor takeaway is that CrowdStrike Holdings, Inc. is clearly a leader in the cybersecurity space, but investors continue to overpay for slowing growth. Once growth officially slows below 30% in FY25, the stock is unlikely to trade at a higher valuation over a year from now.
The risk remains to the downside with any hiccup in the business leading to substantially lower stock prices while offering limited upside, hence exactly why CrowdStrike Holdings, Inc. didn't rally on another earnings beat.
For further details see:
CrowdStrike: Don't Fall For The Hype