CrowdStrike (CRWD -2.75%) has the makings of a great growth stock. Falcon, its platform of cloud-native security services, is easier to scale than comparable services that require on-site appliances.

Its "land and expand" strategy is effective: 61% of its customers had deployed four or more of its cloud-based modules last quarter, up from about 50% a year ago. Its customer base is also growing: It served 8,416 subscription-based customers last quarter, up 85% year over year.

A person accesses cybersecurity services on a tablet.

Image source: Getty Images.

CrowdStrike revenue surged 85% year over year to $609.5 million in the first nine months of fiscal 2021. Its adjusted subscription-based gross margin expanded from 75% to 78% over the same period, and it generated a non-GAAP profit of $31.0 million, compared to a net loss of $58.7 million in the prior year.

Management expects revenue to rise 78% to 79% for the full fiscal year with its first non-GAAP profit. Analysts expect revenue and adjusted earnings to rise another 41% and 64%, respectively, in fiscal 2022. Those growth rates may look attractive, but investors shouldn't buy this stock until three things happen.

1. The market pulls back

CrowdStrike's biggest flaw is its valuation. The stock trades at 41 times fiscal 2022 revenue estimates, making it one of the market's priciest tech stocks. Assuming it stays profitable, it trades at over 600 times forward earnings.

Palo Alto Networks, which provides enterprise firewalls and cloud-based security services, might be growing slower than CrowdStrike, but it trades at just eight times sales and about 55 times earnings.

You can argue that CrowdStrike deserves to trade at higher multiples than Palo Alto due to its superior growth, but the current valuations already reflect years (if not decades) of uninterrupted expansion. Therefore, I'd only consider buying CrowdStrike if a market crash pops its bubble and offers investors a more reasonable entry point.

2. The company reduces its stock-based compensation

CrowdStrike turned profitable on a non-GAAP basis in fiscal 2021, but that metric excludes its stock-based compensation and other expenses. Its GAAP numbers, which include those costs, look less impressive.

In the first nine months of 2021, CrowdStrike posted a GAAP net loss of $73.6 million, compared to a loss of $133.4 million in the prior-year period. Most of that red ink was driven by its stock-based compensation, which rose 83% year-over-year to $102.0 million.

That line item gobbled up about 17% of total revenue during both periods. This heavy dependence on stock-based compensation isn't unusual, since CrowdStrike needs to expand its workforce while conserving cash, but it will also prevent the company from generating a "real" profit anytime soon.

I'm not asking for CrowdStrike to cut its stock-based compensation to zero, but I'd like to see that figure decline as a percentage of its top line. Doing so would also prevent it from further diluting existing shareholders as outstanding shares rose 8% year over year as of Nov. 2020.

3. A higher net retention rate

Like many cloud-based companies, CrowdStrike reports its net retention rate, or its year-over-year revenue growth per existing customer. Traditional cybersecurity companies like Palo Alto generally don't disclose that metric.

CrowdStrike's retention rate hit 147% in fiscal 2019 before it dipped to 124% in fiscal 2020 and "exceeded" 120% in the first three quarters of 2021. That's a solid showing, but it's noticeably lower than the retention rates of other high-growth cloud companies.

For example, the data warehousing company Snowflake ended its fiscal third quarter with a whopping net retention rate of 162%. Datadog, which helps IT professionals monitor software on their networks, kept its net retention rate above 130% over the past several quarters.

I'd like to see CrowdStrike's net retention rate rise alongside its growth in modules. If that happens, it will indicate Falcon's additional modules are generating significantly more revenue per customer for the company.

Am I being too picky?

Some people might say that I'm nitpicking a great growth stock, and I should ignore these flaws and pull the trigger. They may have a point, since CrowdStrike stock could still head higher in this speculative market. 

However, I still hate paying the wrong price for the right company. Therefore, I'll keep an eye on CrowdStrike and patiently wait for a better opportunity to build my position.

This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.