What happened
Shares of CrowdStrike Holdings (CRWD -0.68%) were sliding today as the cybersecurity-focused software-as-a-service (SaaS) company fell along with the crash in tech stocks.
There was no company-specific news out on the SaaS stock, but its high valuation made it a target as investors rotated into safer stocks.
The stock closed down 6.1% today.
Image source: Getty Images.
So what
The tech-heavy Nasdaq finished down 4% today, but there wasn't even a clear explanation for the dive as the S&P 500 also lost 2.8%. Stocks have fallen sharply over the past week as investors are now anticipating a sharp rise in interest rates that could cool off the economy as the Federal Reserve is seeking to bring inflation to heel.
Slower growth would hit high-priced stocks like CrowdStrike especially hard as demand for cybersecurity protection and business confidence in economic growth have driven the company's strong performance.
However, SaaS multiples have gotten stretched during the pandemic, and CrowdStrike now trades at a lofty price-to-sales (P/S) ratio of 32. By comparison, the S&P 500 trades at a price-to-earnings (P/E) ratio of 22. Despite the company's track record, investors seem to be saying that even the most promising software stocks can no longer justify a multiple like that.
Now what
CrowdStrike's revenue jumped 66% to $1.45 billion last year, and it was profitable on an adjusted basis, showing the business is scaling nicely.
However, with a (P/E) ratio of roughly 300, there are some legitimate questions about what a fair valuation for the business should be. Tech stocks now seem to have been overrun by euphoria during the pandemic, and many are now paying the price with the stock down about a third from its peak in November. While the business is strong, shares could still move a lot lower, especially if market sentiment continues to sour.
