2023-09-21 14:03:04 ET
Summary
- CrowdStrike's stock is rising as peer Splunk is being acquired by Cisco.
- Despite the tough macro environment, CrowdStrike has shown resilient revenue growth and margin expansion.
- The company has a net cash balance sheet and may even see inclusion in the S&P 500 index in the near future.
- The company remains a top-tier consolidator in the sector - reiterate buy.
CrowdStrike ( CRWD ) was rising in Thursday morning trading, possibly due to news that cybersecurity peer Splunk ( SPLK ) was being acquired by Cisco ( CSCO ). The rising interest rate environment, spurred by inflation, was supposed to crush tech stocks like CRWD. While the stock did undergo a brutal valuation reset, the company also took the opportunity to show that it can sustain resilient revenue growth rates while driving margin expansion - all in the face of a tough macro environment. The company has clearly benefited from being a consolidator in the space with its deep product portfolio. The company maintains a net cash balance sheet and is generating positive cash flows. I reiterate my buy rating, as the premium valuation is well deserved here.
CRWD Stock Price
CRWD has bounced strongly off the lows and recovered much of its losses. While the stock is still down from all-time highs, I note that tech valuations in 2020/2021 had bubbly characteristics and may be poor reference points.
I last covered CRWD in July, where I stuck by the stock in spite of the run-up due to the company performing very strongly under tough macro conditions. The stock is up around 6% since then, but this remains a long term opportunity.
CRWD Stock Key Metrics
In its latest quarter, CRWD delivered 36.7% YoY revenue growth to $731.6 million, edging out guidance for $727.4 million. I cannot emphasize enough how impressive that growth rate is considering the company’s size and the tough macro environment.
FY24 Q2 Presentation
CRWD saw its dollar-based net retention rate dip sequentially to 125.3%, but this is still higher than their 120% benchmark and markedly higher than tech peers. The past year has seen a bifurcation between point product solutions and deep product portfolios - CRWD has seen strong relative strength due to customers wanting to consolidate their IT spend.
FY24 Q2 Presentation
CRWD coupled the resilient revenue growth with some margin expansion - non-GAAP operating margins have expanded to 19% through the first two quarters of the year.
FY24 Q2 Presentation
CRWD generated $180 million of non-GAAP net income, ahead of guidance for $137 million. In part due to higher interest income courtesy of the higher interest rate environment ($36.6 million versus $7.7 million in the prior year), CRWD was able to post its second consecutive quarter of GAAP profitability. While management has not committed to GAAP profitability on a sustainable basis as of yet, the company is getting closer to four consecutive quarters of GAAP profitability, which would be the main hurdle before it can gain inclusion to the S&P 500 index.
CRWD ended the quarter with $3.2 billion of cash versus $742 million of debt. Between the GAAP profitability and net cash position, CRWD has a bulletproof balance sheet.
Looking ahead, CRWD has guided for 33.6% YoY revenue growth in the third quarter. Management raised full-year guidance from $3.037 billion to $3.0429 billion. That implies around $841 million in fourth quarter revenues, representing 32% YoY growth. That pace of deceleration is quite modest relative to what tech peers are reporting. Management also upped non-GAAP net income guidance to $689 million, up from the prior guidance of $590 million.
FY24 Q2 Press Release
On the conference call , management credited their strong performance as being due to its strong product portfolio, stating that point product companies are “learning the hard way” in apparent shade at endpoint competitor SentinelOne ( S ). Management acknowledged that third quarter revenue guidance is cautious in spite of the easy comparables, indicating both the uncertainty of the macro environment as well as potential for guidance beats. Management noted that generative AI has increased cybersecurity risk and that their company has been working with AI for the last decade. I expect generative AI in part to help the company post resilient revenue growth over the near term, during a period in which decelerating growth rates would seem the most likely.
Is CRWD Stock A Buy, Sell, or Hold?
CRWD is a top tier endpoint protection provider in the cybersecurity sector. Legacy cybersecurity solutions are not equipped to handle the new cyberattack landscape, let alone one enhanced with generative AI.
FY24 Q2 Presentation
CRWD is often thought of as a “consolidator” of cybersecurity solutions due to its deep product portfolio.
FY24 Q2 Presentation
The company has historically sustained its aggressive revenue growth rates through rolling out new products to its portfolio.
FY24 Q2 Presentation
Cybersecurity is one of the most promising subsectors as cyberattacks have become more and more prevalent - a notable recent attack occurred at the casino MGM Resorts .
The company’s strong financial profile and growth story have helped it earn a premium valuation relative to tech peers.
Seeking Alpha
Management has targeted achieving around 22% non-GAAP operating margins exiting this year’s fourth quarter, and expects to remain within their target model thereafter.
FY24 Q2 Presentation
Based on my assumptions for 25% revenue growth, 30% long term net margins, and a 1.5x price to earnings growth ratio (‘PEG ratio’), I see CRWD trading at around 11.3x sales, implying solid upside over the coming years. While enterprises across the world are growing increasingly cost conscious about IT spend, I expect the elevated risks from generative AI enhanced cyberattacks to make bolstering cybersecurity a mission-critical initiative.
What are the key risks? With most tech peers seeing materially lower revenue growth rates following the pandemic, it is possible that CRWD will experience the same fate as well. The stock is pricing in several years of growth, and a reduction in the company’s growth rate is likely to lead to a multiple revaluation lower. The tough macro environment may persist for longer, or even turn worse, leading to increased volatility in the company’s near term growth prospects. As a cybersecurity provider, it is possible that the company suffers a reputation-damaging security breach. The market appears to have once again regained faith in the long term profitable growth profiles of tech companies, but if that were to change, CRWD may be particularly exposed to volatility due to its premium valuation. That said, I expect its strong balance sheet and strong profitability to offer downside support - the company has arguably shown Wall Street enough hints of its long term profitability power.
I reiterate my buy rating for the stock, as I expect generative AI to play an important catalyst even before a macro recovery.
For further details see:
CrowdStrike: Generative AI And The Increasing Importance Of Cybersecurity