2023-11-22 12:35:10 ET
Summary
- CrowdStrike's stock has seen strong momentum, doubling its share price since the start of the year.
- One catalyst for the share price could be the Q3 results which are due to be announced after market hours on the 28th of November.
- We cover some of the important talking points around CRWD's earnings.
- We close with some thoughts on the technicals and the valuations.
Introduction
Back in August, when we last covered the cybersecurity specialist- CrowdStrike ( CRWD ), the stock was up by 40% on a YTD basis, around 500bps more than the tech-heavy Nasdaq. In the ensuing months, we’ve seen much stronger momentum by CRWD, so much so that the relative return differential with the benchmark is now over 2x, and the stock is also on the cusp of doubling its share price from what was seen at the start of the year!
In less than a week, we could have another catalyst that could potentially stimulate another leg higher, or prompt some profit booking at higher levels; we’re essentially referring to CrowdStrike’s Q3 event which is due to take place on the 28th of November. Here are some of the major talking points ahead of the event.
Earnings Considerations
At the outset, let it be known that CRWD has maintained quite a stellar track record during earnings season for a long time now. It has beaten bottom line street estimates for 18 successive quarters on the trot, and more recently, over the last couple of years, the average bottom line beat per quarter has worked out to an impressive 34%.
Seeking Alpha
It is questionable if CRWD will continue to deliver the same magnitude of beat seen in Q2 (32%) as over the last 3 months, CRWD has already seen upward revisions to its Q3 EPS by quite a healthy margin of 18% (even Q4 estimates have been dialed up by 14%).
Consensus expectations at the adjusted EPS level for Q3 now point to a figure of $0.74 . That would be on par with what was seen in Q2 but represent slower YoY growth of 85% (versus 106% YoY in Q2).
One of the highlights this year has been how CRWD has inched its way towards GAAP profitability, after multiple periods of losses and this is something that will persist in Q3 as well with an expected GAAP EPS of $0.04.
With ongoing upselling and further consolidation on the Falcon platform, the topline is still expected to be resilient, coming in at the +700m mark for the second successive quarter ( expected Q3 revenue figure of $778m), although the pace of YoY growth could decline marginally from the 37% levels seen in Q2 to 34%. These numbers are not to be scoffed at when you look at the broader picture; Consider something like the endpoint security terrain, where CRWD has built a name for itself. It’s rather evident that CRWD is taking share here, as the market per se is only growing at around 10% or so.
One metric where investors can perhaps expect a marked improvement from Q2 is CRWD’s net new ARR (annual recurring revenue). Note that in H1, the YoY growth has been rather underwhelming, declining by -9% on average, but this typically tends to pick up in H2, and besides Q3 won’t quite have to contend with the same steep base effect seen in Q2 (In Q2-23, net new ARR had hit record highs of $218m, whereas in Q3-23 this had dropped to $198.1m). On the Q2-24 call, management suggested that net new ARR growth could likely witness double-digit growth through H2. If they deliver as expected, management still deserves a pat on the back as the deal environment and sales cycle aren't particularly easy at this juncture.
Earnings press release/Author's calculations
Nonetheless, with over 90% of CRWD’s topline coming from subscription-related sales, CRWD is also in the midst of witnessing a healthy drop-through at the operating level, so much so that various components of the OPEX, ranging from sales& marketing, research & development, etc. are leaving a less onerous mark. In Q2, CRWD’s non-GAAP operating margin came in at 21% and it will likely linger at the 20-22% level even in Q3/Q4 (this is incidentally the company’s long-term target model range) as H2 typically doesn’t suffer from the step-up in payroll taxes or annual marketing events.
In Q2, CRWD’s FCF margin had declined sequentially to 26%, but this is mainly on account of some timing-related issues. In Q3, it’s reasonable to think that one can expect better conversion, as management’s forecast for the FY is for a much higher FCF margin of 30-32%.
Even if the conversion had taken a back seat, do consider that this is a business that is now growing its FCF annually at an impressive pace of 42% (H1 growth). Thus, note that even though we’ve seen a marked expansion in the market-cap of CRWD these last few months, the stock is still yielding an FCF figure that is around 70bps higher than the long-term average.
We’ve noted previously how CrowdStrike’s overall cash balance had been making a relentless surge across the years, and thus puts it in a healthier position to potentially engage in deeper inorganic growth without unnecessarily leveraging the balance sheet. In Q2 the company’s cash balance finally crossed the $3bn mark for the first time in its history, but we wouldn’t be overly surprised to see this step down a bit in Q3, as the acquisition of ASPM specialist (Application Security Posture Management)- Bionic, would likely have closed in Q3.
On the earnings call, expect CRWD management to likely talk up how Bionic enhances their overall scope, particularly the competence it offers in securing applications across the entire lifecycle from code to cloud. The fact that it can also be deployed on serverless infrastructure is a useful edge.
Closing Thoughts
We’ve written previously on why CRWD is a fine business and it may well end up delivering yet another solid quarter in Q3 as well. However, it’s worth pondering if this is the most optimal point to kickstart a long position in the stock. We don’t believe it is.
The image above provides some context about CRWD’s weekly price imprints all through this year. Since the turn of 2023, we’ve seen the price trend higher within the shape of a healthy ascending channel, offering useful pullbacks every now and then.
However, over the last few weeks, the price action has been particularly strong, breaking past the upper boundary of the channel. Also consider that the 14-period RSI indicator has now hit overbought levels.
Meanwhile, if you were looking for rotational opportunities within the cybersecurity universe, the image below suggests that CRWD wouldn’t represent the most optimal bet, with the relative strength ratio trading around 33% higher than the mid-point of the long-term range.
All in all, the technicals suggest that it wouldn’t be a judicious deployment of resources to pursue the CRWD stock until the stock drops back into the old channel, or at least build a base and flattens outside the channel.
Perhaps, one can also take a few cues from recent insider activity. Relative to the level of insider sales seen all through October, this month, when the uptrend has been rather firm, the level of aggregate selling has been quite elevated, equating to $39m, well over 10x of what was seen previously.
Barcharts
Finally, it's encouraging to note that henceforth, CRWD will deliver positive GAAP EPS numbers on an annual basis, but considering next year's EPS, we can see that forward P/E levels have already doubled from what was seen earlier this year. Besides considering the annual EPS consensus from Jan-24-Jan-26, it looks like you could only be getting 26% earnings CAGR for a P/E of almost 60x.
To conclude, CRWD is a HOLD at these levels.
For further details see:
CrowdStrike: Poised To Deliver Another Resilient Quarter, Although Stock Looks Overbought