CrowdStrike Gets CrowdStruck, But I Have a Long-Term Investment Plan

Cloud-based cybersecurity provider CrowdStrike Holdings (CRWD) reported the firm’s third quarter financial results on Tuesday evening. The stock was taken out to the woodshed overnight, trading down almost 18% as I set about covering and opining on those results.

The short of it is that I do not see anything really that awful in this report. That said, we knew that valuation was and is an issue for the entire cybersecurity software space coming in.

For the three month period ended October 31st, CrowdStrike posted adjusted EPS of $0.40 (GAAP EPS: $-0.24) on revenue of $580.882M. The firm beat Wall Street on both the top line and adjusted bottom line. Those results were up from $0.17 and $380.051M (+52.8%) a year ago.

The GAAP print was down from a comp of a loss of $0.22 for Q3 2021. The primary adjustment made ($0.59) was for stock-based compensation. Stock based compensation expense came to $140.113M. which is 24% of total revenue. This is unsustainable going forward. The pace of the firm’s sales growth as well as better control over payroll should help here.

ARR (Annual Recurring Revenue) grew 54% to $2.34B, of which $198.1M was new this quarter. Adjusted subscription gross margin landed at 78%, below the 79% year ago comp. Net new subscription customers increased 44% to 21,146. Subscription customers having adopted five+, six+, and seven+ modules now respectively stand at 60%, 36%, and 21%. Free cash flow increased 41% to $174.077M as free cash flow margin dropped from 32% to 30%.

Business Performance

– Subscription drove revenue of $547.376M (+53.3%), as the cost of this revenue increased 57.6% to $134.229M. This placed gross profit at $413.147M (+52.1%).

– Professional Services drove revenue of $33.506M (+45.6%), as the cost of this revenue increased 48.1% to $23.999M. This placed gross profit at $9.507M (+39.4%).

Cautious

CEO George Kurtz commented in the press release: “Total ARR was below our expectations as increased macroeconomic headwinds elongated sales cycles with smaller customers and caused some larger customers to pursue multiphase subscription start dates, which delayed ARR recognition until future quarters.”

Kurtz explained further in the earnings call: “As Q3 progressed and fears of a recession grew, this dynamic became more pronounced. In our smaller, more transactional accounts, we saw customers increasingly delay purchasing decisions with average day to close lengthening by approximately 11% and net new ARR contribution decreasing $15M from Q2.”

Kurtz goes on to explain that the firm’s “win-rate” improved meaningfully, so as sales cycles lengthen, he believes that these deals are not lost. Kurtz expects these conditions to persist into the current quarter.

Guidance

– For the current quarter: The firm sees revenue at $619.1M to $628.2M. Consensus had been for about $633M. Adjusted income from operations is seen at $87.2M to $93.7M. Adjusted EPS is expected to print in between $0.42 and $0.45 on adjusted net income of $100.9M to $107.5M. Wall Street was looking for adjusted EPS down around $0.34.

– For the full year: The firm sees revenue at $2.223B to $2.232B. Consensus had been for about $2.23B. This is up from prior guidance of $2.190.5B to $2.205.8B. Adjusted income from operations is seen at $347.2M to $353.8M. Adjusted EPS is expected to print in between $1.49 and $1.52 on adjusted net income of $357.6M to $364.4M. This is up from prior guidance of $1.31 to $1.33. Wall Street had been looking for $1.34.

Balance Sheet

CrowdStrike ended the quarter with a net cash position of $2.467B and current assets of $3.204B. Both of these entries are up significantly from the start of the year. Current liabilities amount to $1.817B, $1.483B which is made up of deferred revenue. The firm stands at quarter’s end with a healthy enough current ratio of 1.36.

Total assets add up to $4.469B, including $517.785M worth of “goodwill” and other intangibles. At 11.6% of total assets, I see no problem here. Total liabilities less equity comes to $3.132B. This includes $740.6M in long-term debt and another $532.3M worth of deferred revenue labeled as non-current. CrowdStrke could pay off its debt-load more than three times over, out of pocket. This is a very strong balance sheet.

Wall Street

I have found 13 sell-side analysts rated at four stars or better at TipRanks who have also opined on CRWD since this earnings release. There are a bevy of cuts to price targets and one notable downgrade. Among the 13, there are 12 “buy” or buy-equivalent ratings, and one “hold” rating. One of the “buys” chose not to set a target price. The average target price across the other 12 is $161.92 with a high of $180 (Shaul Eyal of Cowen & Co) and a low of $120 (Brad Reback of Stifel Nicolaus). Once omitting the high and low targets as outliers, the average target price rises to $164.30.

My Thoughts

I don’t think the third quarter, upon completion, looks bad at all. The fourth quarter revenue guide and the CEO’s honest take during the conference call were enough to rattle shareholders in a name that came in trading at more than 100 times forward looking earnings. Investors who have not, really should read the transcript of the call. I tried to excerpt Kurtz’s comments here for the purposes of writing an article short enough to be read. He goes into greater detail at some length during the call.

I respect the candid take, by the way. It should not be missed that the firm raised full year guidance for both revenue and profitability and reiterated the firm’s vision to reach its target operating model during fiscal 2025 (CY 2024) and grow ending ARR to $5B by the end of FY 2026 (CY 2025).

Know what I think. I think CRWD is tradeable. More than that, starting at these levels, with a significantly reduced valuation, I think CRWD is becoming investable… especially with a forward looking earnings multiple more comparable to what we see at Palo Alto Networks (PANW) , and less comparable to valuation that Zscaler (ZS) traded at.

The stock remains in a downtrend and will test the lower line of descending support today. My thoughts? A small entry around $110. Followed by incremental purchases down to around $105. Then take a look. Zscaler reports on Thursday evening, so baby steps here.

I am looking at this as the start of a potentially long-term investment. I am not yet long the equity, as I took the time to write this piece first. I expect to be long before the day is out.