CrowdStrike: Fundamentally Strong (NASDAQ:CRWD) | Seeking Alpha

Thesis

CrowdStrike Holdings, Inc. (NASDAQ:CRWD) posted positive Q2 FY24 earnings and raised its FY24 revenue guidance to $3.036 billion, which represents a 36% YoY growth. While it may appear that the company is overvalued compared to other cybersecurity companies, I don’t share that sentiment, since the company is achieving impressive growth figures every quarter. Furthermore, comparing CrowdStrike to other growth cybersecurity companies like Zscaler (ZS) and Cloudflare (NET), would position it as a bargain, which is why I’m giving it a Buy rating.

Another Strong Quarter

CrowdStrike just had another decent quarter in terms of both growth and profitability. The Cybersecurity leader achieved $731 million in total revenue, which represents 36% YoY growth. While this may seem concerning to some due to the lower growth rate, I believe this is just the natural progression for growth stocks since 50% growth isn’t really sustainable, especially when trying to increase profitability.

Q2 FY24 represents the second consecutive quarter of profitability for CrowdStrike, where it achieved $9 million in net income, a statement that couldn’t be said for most growth cybersecurity stocks or growth stocks in general for that matter. Additionally, its total gross margin increased by 227 bps to 75% and its subscription gross margin by 160 bps to around 78%, which improved its position regarding profitability.

The company also continued to operate with a really strong balance sheet, with $3.16 billion in cash compared to $2.8 billion in Q1 due to generating $245 million in operating cash flow. The increase in liquidity represents another quarter of decline in CrowdStrike’s net debt, leaving it with more than enough cash for future acquisitions and expansions. This also means that it could take on new loans if it decides to go for more ambitious acquisitions that its available cash alone won’t be enough for.

Since CrowdStrike has historically realized its lowest cash flow in Q2, I believe it will see a sequential increase in its operating cash flow in Q3, which will further improve its already strong balance sheet.

Since its sequential cash flow growth from Q2 to Q3 has averaged around 30% in the last two years, I project its Q3 operating cash flow to be around $318 million.

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Not an Overvalued Stock

The main talking point for the bears is that CrowdStrike is overvalued on a P/S and P/E basis, and while I see where they’re coming from, I don’t think it is entirely true. If we look at the chart below, we can see a clear gap between the four cybersecurity stocks on the left and the rest of the chart.

The stocks on the left, which include CrowdStrike, can be considered growth stocks. This is due to the fact that these companies are yet to achieve profitability and have a YoY growth rate of more than 30%, and CrowdStrike is positioned around the lower end amongst these stocks. Furthermore, it is the only company to achieve profitability among these growth stocks, which makes it the more attractive option among the cybersecurity growth stocks.

While it may trade at a really high P/E compared to Palo Alto Networks (PANW), VMware (VMW), and Akamai (AKAM), its price cash flow ratio is only second to Akami’s. This means that it is bringing the best of both worlds with it, generating a sizable amount of cash while maintaining a high growth rate. For this reason, I consider CrowdStrike undervalued compared to other cybersecurity stocks.

With CrowdStrike having the lowest P/S among growth cybersecurity stocks while being the only one to achieve profitability among them, I think it is undervalued. Adding to that, its price to cash flow ratio makes it a bargain in my eyes.

Risks

Like most growth stocks, CrowdStrike faces the risk of its stock plummeting if it misses on investors’ expectations regarding growth since its growth is partially factored into the current valuation. Furthermore, while it has achieved profitability for two consecutive quarters, it has yet to reach positive operating income, which means that it relies on interest income to bridge the gap between its operating income and net income. If its interest income declines, whether due to interest cuts or a cut in investments from CrowdStrike’s part, its net income may dip into the negatives. This is why I believe that it needs to achieve operating income as fast as possible to avoid this risk.

Conclusion

CrowdStrike just had another strong quarter and has continued its growth trajectory in Q2 FY24. It has also improved its guidance for FY24 for the second time now, which is an extremely positive sign. While some investors believe CrowdStrike may be overvalued, I believe the opposite. The cybersecurity leader is positioned nicely between other growth cybersecurity stocks in terms of price to sales ratio while also being profitable. It is also outperforming most of the popular cybersecurity stocks in terms of price to cash flow ratio, which is why I give CrowdStrike a buy rating.