CrowdStrike Holdings (NASDAQ:CRWD) was one of the hottest IPOs this year, more than doubling its stock price after its mid-summer 2019 debut. In the last month and a half, though, several Wall Street analysts have doused the stock with cold water. Shares have reversed early gains, and are back near the prices they were at when the company first started trading.
The stock's valuation is still sky-high, but the recent trouncing means this is one of those times when growth investors will want to take the opportunity to add to their positions.
How did we get here?
The cybersecurity industry is undergoing disruptive change. Cloud computing has changed the work dynamic over the last decade -- employees can now access apps and data from anywhere via a connected device. Businesses thus have to keep up with the security needs of their mobile workforces to keep vital information protected, and new security software firms born in the cloud have emerged to challenge incumbents -- those that historically have only needed to secure physical locations via hardware or software.
One of the upstarts is CrowdStrike, an endpoint security firm that deploys its software via the cloud to mobile devices like laptops, tablets, phones, and IoT devices. Its services have been in high demand. Sales more than doubled in both 2017 and 2018 before the company was public, and through the first half of 2019 revenue is up another 98%. It's still operating at a loss as it attempts to maximize its upside right now, but the torrid rate of expansion and high profit margins on services sold (gross margin was 70% through the first six months of 2019) had early investors feeling particularly rosy.
The quick reversal in fortune came after a round of stock analyst coverage that called for a sell based on the company's perceived inflated valuation. Specifically, Goldman Sachs lowered the stock to a sell in early October, citing elevated investor expectations. Citi did the same shortly thereafter for the same reason. They didn't take issue with CrowdStrike's business, as much as with the batty valuation. Even after the pullback, shares are going for 30.0 times trailing 12-month sales. For the sake of comparison, fellow cloud cybersecurity outfits Zscaler and Okta are priced at 19.8 and 28.6 times 12-month sales, although they are both growing at a more modest pace.
How to buy stocks like CrowdStrike
All of this shouldn't be a surprise. There are a myriad of issues with buying stocks that have recently gone public that tend to make them especially volatile. CrowdStrike is no exception, even if sales are currently doubling. In writing about the company in the past, I've urged interested investors to keep positions small and to buy a little at a time while building out larger positions slowly -- perhaps buying monthly, quarterly, or after an inevitable dip. Same goes for other cybersecurity upstarts like Zscaler and Okta, or any high-octane growth stock for that matter.
This steep drop from the high-water mark looks like one of those times to buy a little, though. Back near its public debut price point after posting back-to-back quarters of doubling year-over-year sales, CrowdStrike is hard to ignore. Granted, the price-to-sales ratio still looks crazy, but if the company can keep its momentum (management conservatively forecasted at least 78% full-year 2019 growth), the sky-high number will moderate in time.
Besides, there is a lot of promise for CrowdStrike's endpoint security suite. Connected devices are increasing by the hundreds of millions every year, and the company's cloud-native software makes it easy for an organization to deploy protection to all of those new connected "things." CrowdStrike has also been working on adding adjacent security services to its list of offerings and launched an investment fund to foster new start-ups utilizing its platform. According to researcher Global Market Insights, spending on cybersecurity in general is expected to grow an average of 12% a year through 2024.
While CrowdStrike stock taking a tumble isn't a surprise, the long-term potential is still there. Over 40% off of highs, now looks like the time to buy a few shares on the dip.