CrowdStrike Holdings, Inc. (NASDAQ:CRWD) investors were hammered by an initial post-earnings selloff as the leading cloud-native endpoint cybersecurity player released earnings.
The company’s first-quarter earnings report disappointed investors who anticipated a more robust guidance upgrade. I highlighted in my previous article that market operators have likely baked significant optimism into CRWD’s aggressive valuation.
Hence, these investors likely aren’t satisfied as some metrics and management commentary suggest things aren’t “pristine.” For instance, management annotated its commentary with “increased deal scrutiny and longer than typical sales cycles, especially for larger consolidation deals.”
Moreover, CrowdStrike’s net new annualized recurring revenue or ARR fell 22% QoQ. While the comp was against “an exceptionally strong fourth quarter,” it highlighted that even CrowdStrike wasn’t immune to the ongoing enterprise spending optimization in the software space.
As such, I assessed that the selloff is justified to reflect these ongoing uncertainties. Notwithstanding, I applaud management’s continued commitment to achieving GAAP profitability, which CFO Burt Podbere aptly called the company’s “third evolution.” However, it’s also critical for investors to consider that the company’s focus is not on reaching “sustainable GAAP profitability” right now.
Given CrowdStrike’s addressable market and potential to gain more share against the legacy players, I believe the company’s strategy is justified. Management telegraphed its confidence in further share gains through its leadership in endpoint security, as “it’s still a very fragmented market.”
As such, I believe CrowdStrike must leverage its AI-driven security solutions to improve its competitive edge against the legacy players and cloud computing hyperscalers.
CrowdStrike emphasized that while generative AI has opened up new opportunities for existing players and adversaries, the company has a significant data advantage.
As such, it believes it can leverage that data advantage to further stretch its leadership, as it aims to gain more share through increased module adoptions. Notably, Podbere articulated that CrowdStrike “closed over 50% more deals involving eight or more modules this quarter compared to a year ago.” Therefore, I assessed that it corroborates management’s confidence that it’s making substantial progress through its tech leadership.
However, investors must also take a well-balanced view of the competition the hyperscalers offer. In early May, Forrester highlighted that Microsoft Azure (MSFT) is a leader in the Infrastructure-as-a-Service Platform Native Security or IPNS. Amazon Web Services (AMZN) or AWS and Google Cloud (GOOGL) join Azure to form the leadership pack, well ahead of the other cloud service providers in Forrester’s assessment.
Azure also reminded investors that it has a “multi-cloud approach,” proffering the opportunities for its customers to “centralizing and unifying their security needs on other public clouds as well.”
Moreover, in late April, Insider reported that Microsoft CEO Satya Nadella scored a coup, as the company managed to attract AWS co-founder Charlie Bell to Microsoft Security. Bell is a highly-regarded cloud computing executive tasked with expanding and enhancing Microsoft cybersecurity’s offerings to take on AWS. Notably, Bell demonstrated his Amazonian instincts when he helped develop Azure’s Security Copilot in double quick time, “which took only a matter of months to go from idea to launch, a much faster timetable than is typical at Microsoft.”
As such, I assessed that with Azure committing to generative AI to enhance its offerings significantly, it remains to be seen how fast the “supposed” gap with CrowdStrike could be bridged. Microsoft could also “creatively” bundle its security offerings with its customers at a more attractive price, along with new generative AI packages exclusive to Azure.
As such, it could compel CrowdStrike to demonstrate even more value for its customers against a rejuvenated Azure that’s already considered a market leader.
CRWD price chart (weekly) (TradingView)
I don’t think there should be any doubt that CRWD’s valuation is expensive. With forward earnings of more than 60x and a forward free cash flow or FCF yield of 2.7%, significant optimism has been reflected.
As such, even though the Technology sector ETF (XLK) nearly re-tested its all-time highs last week, CRWD remains more than 50% below its 2021 highs. The speculative fever has moved to pure-play AI stocks, and CRWD is not considered part of that category.
Therefore, I believe it’s appropriate for investors who bought CRWD’s pessimistic levels in January and May to consider cutting exposure and wait to see where this pullback takes us.
Given CRWD’s aggressive valuation, investors rotating out of tech to undervalued sectors will not likely spare it from a well-deserved hammering.
Rating: Sell. (Revised from Hold).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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