CRWD with Nobias technology: Crowdstrike: Can the Company’s Growth Prospects Justify Its Speculative Valuation Premium?
As the world continues to move forward into the digital age, cyber security is becoming more and more important to nearly every aspect of our daily lives. The COVID-19 pandemic accelerated growth across the digital economy, especially with regard to the recent work-from-home trend, which has demanded that individuals and businesses alike retool their digital security practices. Such strong demand for cyber security tools has led to strong growth (and share price performance across this industry).
Crowdstrike (CRWD) has been one of the biggest beneficiaries of this trend, rising quickly from its 2019 IPO to the most valuable name in the cyber security space with a market cap of $62.2 billion. The company’s fundamental growth story has been quite strong during the last two years and since CRWD reported Q2 earnings this week, we wanted to take a look at the company’s results to see whether or not the growth trend remained in place.
Nicholas Rossolillo, a Nobias 5-star rated analyst, published a piece back in July which highlighted Crowdstrike’s first-half strength. He noted that the cyber security firm has benefited from the accelerating digital workplace created by the pandemic saying, “Endpoint security, which protects devices connected to the internet or an organization's private network, was a high-growth segment of the cybersecurity space before the pandemic, but COVID-19 turned endpoint software into a staple.”
Rossolillo continues, saying that even in a post-pandemic world, “Things like remote work and cloud computing are here to stay, and CrowdStrike's high-growth story remains intact as a result.” Billy Duberstein, a Nobias 4-star rated analyst, also posted a report on CRWD back in July, highlighting the recent trend of cyber attacks and the long-term growth runway that Crowdstrike has in front of it. He wrote, “From last year's Sunburst attack, to the more recent Colonial Pipeline hack, to this past weekend's ransomware attack on IT management software firm Kaseya, concerns over cybersecurity aren't going away anytime soon. In fact, they're on the rise. In that light, best-in-class cybersecurtity companies should have a long runway for growth. With its novel artificial-intelligence and cloud-based architecture, CrowdStrike looks to be one of those winners.”
Crowdstrike has the largest market cap of the pureplay cyber security names, which is interesting because its present fundamentals trail rival Palo Alto Networks (PANW) by a fairly wide margin. During Q2, CRWD generated sales of $337.7 million. PANW’s sales totaled $1.22 billion. However, as Rossolillo points out, this isn’t necessarily a story about the present. CRWD investors base their bullish opinions on the company’s relatively stronger growth prospects.
Rossolillo wrote, “CrowdStrike's security software suite checks off all the right boxes. It's a cloud-based service, so it's easy to deploy across devices even if a workforce is remote. It's a subscription service, so it doesn't require massive up-front investment to purchase. And new CrowdStrike modules are constantly being developed, scaling the security platform's capabilities to the needs of large and complex organizations.”
Being perfectly situated to benefit from current digital trends is what enabled CRWD to post 69.7% revenue growth during Q2. This came after 70.1% sales growth during Q1. During its Q2 conference call this week, Crowdstrike’s CEO,George Kurtz highlighted his company’s recent success saying, “Our continued strong performance was driven by the groundswell of customers turning to CrowdStrike as their trusted security platform of record. We saw strong demand across the market which for us spans large enterprise, mid-market and SMB customers. Our success in gaining share in each of these market segments is reflected in our net new customer growth rate which on an organic basis accelerated in the quarter. In total, 1,660 net new customers chose CrowdStrike as their security partner, bringing our customer count to 13,080. The CrowdStrike brand is viewed as the gold standard in security.”
During the conference call, CRWD’s CFO, Burt Podbere touched upon the stock’s annual recurring revenue (subscription sales) growth saying, “We once again ended the quarter with a record pipeline which we believe indicates a strong foundation for future growth. In the quarter, we delivered 70% ARR growth year-over-year to exceed $1.34 billion. Rapid new customer acquisition as well as expansion business within existing customers drove substantial growth in the second quarter, once again resulting in very strong net new ARR which came in at an all-time high of $150.6 million. Our dollar-based net retention rate was once again above our benchmark.” In short, the company continues to beat even its own growth expectations.
This ~70% growth rate dwarf’s the ~20% sales growth that PANW has been generating in recent quarters (PANW’s year-over-year sales growth during the last 8 quarters has been 22.44%, 17.67%, 14.83%, 19.65%, 17.94%, 22.55%, 24.51%, and 23.52%). Obviously there is nothing wrong with such reliable double digit growth. PANW trades with a high valuation premium because of its growth history and prospects. Right now, PANW’s blended price-to-earnings ratio is approximately 75x. However, the market has been willing to place a premium on CRWD shares which is roughly 10x higher because of its relatively brighter outlook.
Right now, CRWD’s blended price-to-earnings ratio is 728.5x. However, due to the stock’s strong future growth prospects, CRWD is much cheaper using forward looking metrics. Using fiscal 2023 analyst consensus earnings estimates, CRWD’s current P/E ratio is 347.5x. Looking out to the consensus estimate for fiscal 2024, CRWD is trading with a 206x forward multiple.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Obviously these figures represent a highly speculative growth premium, but the analyst community currently expects to see Crowdstrike maintain its ~70% growth on both the top and bottom lines for the foreseeable future and therefore, investors have been willing to place risky bets on shares.
Rossolillo agrees with this bullish sentiment. He concluded his recent piece saying, “With data security demand only rising and poised to continue for as long as the digital world keeps expanding, CrowdStrike remains a top stock in the cybersecurity industry.”
Duberstein concluded his piece which an even more bullish statement: “It appears the only things that could derail CrowdStrike's run would be an external economic shock or rising interest rates. But after surging earlier this year, the 10-year Treasury yield has declined significantly from its late March highs, signaling that the bond market isn't overly worried about runaway inflation that could harm high-multiple stocks like CrowdStrike. So barring an unexpected rise in long-term interest rates, investors shouldn't be afraid to stick with this Motley Fool favorite.”
Right now, the community of credible authors that the Nobias algorithm tracks agree with this bullish outlook. According to our algorithm, 78% of credible analysts have a “Bullish” opinion on CRWD shares. The average price target amongst credible analysts is $314.33. Today, CRWD trades for $278.23. This price target implies upside potential of approximately 13%.
Disclosure: Nicholas Ward has no position in any company mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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