CrowdStrike (CRWD -0.68%) is undeniably a great story among cybersecurity companies. The cloud-based endpoint security software stock is up by over 200% since it went public in 2019. But CrowdStrike has gone through some growing pains too. Shares are down by 35% from the all-time high they set in late 2021, and are down by around 28% over the last 12 months. With 2022's bear market still raging on, has this high-growth cybersecurity leader slipped to the point where it's a buy yet?
Impressive numbers, but with a catch
Long gone are the days when we could focus on a company's impressive sales growth and watch the stock rocket higher. With the Federal Reserve hiking interest rates and tightening the money supply to combat high inflation, the market has been throwing a tantrum over companies with high revenue growth rates but little to no profitability.
The good news about CrowdStrike is that it delivers on both fronts. In its fiscal 2023 second quarter, which ended July 31, revenue rose 58% year over year to $535 million. Free cash flow (an important profitability metric) increased 85% to $136 million, giving it a healthy free cash flow profit margin of 25%. As this software-as-a-service outfit expands, its operation is getting more efficient and margins are rising -- making it exactly the type of company investors favor these days.
So why the ho-hum stock performance this year? Two reasons: valuation and stock-based compensation.
First, let's address its valuation. Even though it has put up torrid growth and its stock price has fallen, CrowdStrike trades at an enterprise-value-to-free-cash-flow ratio of 74. That's a testament to the premium it was sporting before the Fed started raining on the stock market's parade last year, but even now, it's a valuation that assumes that profitability will keep rocking along at a similar rate for at least a couple more years. Lucky for us shareholders, endpoint cybersecurity (for everything from laptops to the robots at e-commerce fulfillment warehouses) is booming right now, so CrowdStrike has that going for it.
This leads us to the second factor: stock-based compensation. Rewarding employees with company stock is a common -- some might even argue important -- method of attracting and retaining tech talent. It's a competitive market out there for top software engineering workers and related professionals, and CrowdStrike doles out lots of new stock to hold onto its key team members. Through the first half of this fiscal year, the company has paid out $234 million in stock-based comp, nearly 23% of revenue generated.
The effect this has on prior shareholders is to dilute the value of their stock. Basically, the company's growth in revenue and profitability doesn't flow through to shareholders at the same rate as the top line. Over the last 12-month stretch, trailing revenue per share and free cash flow per share (which includes the effect of stock-based comp) are up 39% and 29%, respectively.
CRWD Revenue Per Share (TTM) data by YCharts
Focus on profitability over the long term
The good news is that free cash flow per share growth of 29% is nothing to balk at. This company is still early on in its journey. And with CrowdStrike's cybersecurity platform firing on all cylinders in a business world that is increasingly remote and mobile, there's a good chance its pace of expansion will continue for quite some time. That makes it likely that pure free cash flow generation will rise at a rapid pace too. If you're investing for the long haul (at least a few years, but the more, the better), CrowdStrike remains an incredibly promising stock to own.
But stock-based compensation isn't going to disappear anytime soon, either. The question investors need to answer is whether the stock is worth buying at its current valuation. Given the ongoing market dynamics favoring slower-but-steadier value stocks, I think CrowdStrike's volatility will remain elevated for now.
Granted, I'm a happy shareholder and will continue to hold. But with new money, I'm currently choosing to buy other cybersecurity stocks like Palo Alto Networks (PANW 0.11%) and Fortinet (FTNT 1.00%) instead.
