Is CrowdStrike Stock a Buy Now?

CrowdStrike (CRWD 2.03%) posted its second-quarter report on Aug. 30. The cloud-based cybersecurity company's revenue rose 58% year over year to $535.2 million, which beat analysts' expectations by $18.7 million.

Its adjusted net income jumped 232% to $85.9 million, or $0.36 per share, which also cleared the consensus forecast by $0.09. On the basis of generally accepted accounting principles (GAAP), it narrowed its net loss from $57.3 million to $49.3 million, or $0.21 per share.

Image source: Getty Images.

CrowdStrike's headline numbers were impressive, but is it a safe stock to buy as rising interest rates rattle the tech sector? Let's review its growth trajectory, forecasts for the future, and valuations.

It's still growing like a weed

Unlike many older cybersecurity companies, CrowdStrike doesn't install any on-site equipment, which is expensive, takes up space, and can be difficult to scale up as an organization expands. Instead, it provides all of its end-to-end security modules as subscription-based, cloud-native services.

That disruptive approach is catching on. Between fiscal 2019 and fiscal 2022, which ended this January, CrowdStrike's total number of subscription customers jumped from 2,516 to 16,325 as its annual revenue surged from $250 million to $1.45 billion -- representing a compound annual growth rate of nearly 81%. Its annual recurring revenue (ARR) also increased from $313 million to $1.73 billion during that period.

In the second quarter of fiscal 2023, CrowdStrike's number of subscription customers rose 51% year over year to 19,686, while its ARR increased 59% to $2.14 billion. Those growth rates have gradually cooled off over the past year, but they're still very impressive for an 11-year-old company.

Data source: CrowdStrike. YOY = Year-over-year.

CrowdStrike expects its revenue to rise another 50% to 52% year over year in the third quarter. It also slightly raised its full-year revenue forecast from 51% to 52% growth to a range of 53% to 54%.

Its ecosystem is getting stickier

CrowdStrike's Falcon platform consists of more than 20 cloud-based modules. It initially provides customers with a trial offering of four modules, then "lands and expands" by selling additional modules.

The percentage of CrowdStrike's subscription customers that used four or more of its modules surpassed its "milestone" of 70% at the beginning of fiscal 2023. Therefore, it retired that older metric in the first quarter of the year and started tracking the percentage of customers that used seven or more modules instead.

Data source: CrowdStrike. *Not available.

Those rising penetration rates indicate that CrowdStrike's ecosystem is getting stickier. Its dollar-based net retention rate has also consistently remained above its benchmark of 120% since its initial public offering in 2019, and that metric reached what the company called its "highest levels in seven quarters" during the second quarter.

Its margins remain stable

Unlike other hypergrowth stocks that operate at paper-thin or negative margins, CrowdStrike has gross and operating margins that remain fairly stable. Its adjusted gross margin stayed flat year over year at 78% during the second quarter, while its adjusted operating margin rose 7 percentage points to 17%.

On a GAAP basis, its gross margin stayed flat year over year at 76%, while its operating margin rose from negative 14% to negative 9%. Those improvements suggest it can eventually turn profitable on a GAAP basis.

CrowdStrike expects its adjusted operating margin to remain flat year over year at 13% in the third quarter and to also stay nearly unchanged at 14% for the full year. That rock-solid stability indicates that the company still has plenty of pricing power in its market and that economies of scale are gradually kicking in as it expands.

Those stable margins should enable CrowdStrike to squeeze out robust earnings growth as its revenue rises. It expects its adjusted earnings per share (EPS) to increase by 76% to 88% year over year in the third quarter. It also significantly raised its full-year adjusted EPS growth forecast from a range of 76%-82% growth to 96%-99% growth.

But its valuations are still high

CrowdStrike is still firing on all cylinders, but its stock already trades at 145 times this year's adjusted earnings and 20 times this year's sales. Those high valuations could limit its upside potential in this tough market.

By comparison, Palo Alto Networks -- which is growing at a slower rate but is on track to generate stable GAAP profits this year -- trades at 59 times its forward adjusted earnings and eight times this year's sales. CrowdStrike's cloud-based zero-trust competitor Zscaler, which is growing slightly faster and generating slim non-GAAP profits, trades at 154 times forward earnings and 21 times this year's sales.

CrowdStrike's stock is expensive, but I believe its growth rates justify its premium valuation. Therefore, it's still worth buying right now, but investors shouldn't expect it to blast off over the next few quarters.