Kenstocker
Investment Thesis
CrowdStrike (NASDAQ:CRWD) delivers to investors everything they could have wished for. A beat on the top, the bottom, and a raise. For that, the stock is up 6% premarket.
CRWD stock is viewed as being richly priced at approximately 80x forward non-GAAP EPS. But there again, this is arguably the leading stock in its space, and it’s growing nearly faster than everyone else.
In essence, that’s the going price for participation in this stock, and this was yet another unblemished earnings report. There’s a lot to like here, so let’s get to it.
Rapid Recap,
In my previous analysis in March, I said,
I find CrowdStrike’s prospects compelling, driven by its remarkable financial performance and strong growth outlook. As a forward run-rate, I’m projecting $1.7 billion in free cash flow over the next twelve months. The company’s ongoing hyper-growth, anticipating a +30% CAGR in revenue, speaks volumes about its resilience and dominant market presence.
Author’s work on CRWD
CRWD is a stock that I’ve been bullish on for a while, and it has beaten the S&P500 by a wide margin. Including the premarket jump, this stock is up more than 100%, versus the S&P 500, which is up under 18% in the same period. So, let’s now press ahead.
CrowdStrike’s Near-Term Prospects
CrowdStrike offers a comprehensive cybersecurity platform called Falcon to protect against cyber threats, integrating multiple security functions into a single solution for faster protection. In contrast, SentinelOne (S) also provides AI-driven cybersecurity, but typically focuses on endpoint protection. CrowdStrike sets itself apart by emphasizing a seamless integration of various security modules, resulting in a reduced need for separate security products.
CrowdStrike’s near-term prospects appear exceptionally strong, underpinned by their robust performance. The company’s AI-native Falcon platform is driving significant growth, reflected in their record-breaking Q1 results. Key metrics include a 22% y/y increase in net new Annual Recurring Revenue and a 33% rise in ending ARR, reaching $3.65 billion. These achievements, alongside a record subscription gross margin of 80% and free cash flow of $322 million, support just about any narrative CrowdStrike could deliver.
This platform’s ability to integrate seamlessly and deliver rapid, effective security responses has attracted significant customer and partner interest, resulting in substantial growth in multi-module deals. Strategic initiatives such as the Falcon Flex subscription model and key partnerships with industry leaders like NVIDIA and Google Cloud further enhance their market position.
That being said, CrowdStrike is facing some headwinds too, particularly in the Security Information and Event Management market where competition from vendors such as Splunk (PRIVATE) remains strong. Hence, converting customers to CrowdStrike’s offering requires significant sales efforts.
Given this background, let’s now discuss its financials.
CrowdStrike Upwards Revises Its Guidance
CRWD revenue growth rates
In my previous analysis, I said,
CrowdStrike’s guidance for Q1 and fiscal 2025 points towards its revenue growth rates stabilizing. After all, fiscal Q4 2024 marked the 12th consecutive quarter of decelerating growth rates. Investors really needed to see that CrowdStrike had already been through the bulk of its “digestion” period in the sector and that now, it could be back to taking market share.
Here’s the thing, if you follow the tech space intently, you’ll have seen that many software businesses have been reporting lackluster guidance, and their stocks have been punished. This is a very brief list of some names that come to mind.
Data by YCharts
The problem here has been that investors had come to believe that the need for software was a forever-growing secular demand. Sprinkle in a few AI buzzwords, and any valuation was justified. Well, it appears that this trade is done.
Meanwhile, CrowdStrike’s fiscal Q1 managed to deliver 33% y/y growth in the quarter. That’s not quite as strong as SentinelOne, a stock that I own and recommend, but there again, let’s be clear, CrowdStrike is delivering nearly $1 billion of revenues in 90 days. Whereas, SentinelOne is delivering approximately a fifth of that growth. SentinelOne should be growing faster. Even though, I must declare, that SentinelOne’s investment thesis is about it reaching profitability early in 2025, which is a different thesis from that of CrowdStrike.
Case in point, CrowdStrike raised its guidance by just under 1%. After all, that’s what growth stocks should do. Beat the guidance. Raise. Repeat. Meanwhile, SentinelOne lowered its revenue guidance by 1%. And the stock got hit hard (down approximately 15%). Even though, its underlying profitability improved by 32,000 basis points y/y, an astonishing feat to accomplish in twelve months.
Again, to repeat, consider the present backdrop. Outside of cybersecurity, I’m not aware of too many areas of the market within tech that are striving. Even for AI, outside of Nvidia (NVDA), I’m not aware of too many pockets that are performing particularly strongly.
Consequently, given this context, I believe that investors were more than willing to deliver a relief rally to CrowdStrike, simply on the assurance that things aren’t getting any worse for the cyber-giant.
Given this context, let’s discuss its valuation.
CRWD Stock Valuation – 80x Forward Non-GAAP EPS
CrowdStrike is priced at 80x forward non-GAAP EPS. That’s not cheap. Far from it, in fact.
But here again, where are growth investors going to find a leading growth stock on sale? That’s the going price for investors to get peace of mind.
After all, with CrowdStrike, investors are willing to pay a large premium for a lack of negative surprises. Investors know that CrowdStrike’s growth rates are fast, steady, predictable, and recurring. An investor’s dream, right?
On the other side of the argument, I’ve seen this movie happen, where a company’s outlook was so pristine, so impressive, that it appeared for a long while that no price is too high to pay up for a well-positioned company, with an alluring narrative, and all of a sudden, the outlook becomes somewhat less appetizing, and then suddenly, without warning that multiple is brought into question.
That’s why I prefer to get my tech stocks with a few more hairs on them so that the multiple isn’t as stretched. It’s all about preference.
The Bottom Line
I believe CrowdStrike’s financials and valuation paint a compelling picture of its market strength and growth potential. The company has demonstrated remarkable financial performance, with a 22% y/y increase in net new Annual Recurring Revenue and a 33% rise in ending ARR, reaching $3.65 billion. Additionally, CrowdStrike achieved a record subscription gross margin of 80% and generated $322 million in free cash flow.
Despite being priced at approximately 80x forward non-GAAP EPS, which is not cheap, investors should be willing to pay a premium for its steady, predictable, and recurring growth.
I trust that investors will cheer these results and propel the stock higher.
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