At first glance, CrowdStrike Holdings' (CRWD 3.97%) recent fiscal third-quarter report looked phenomenal. The global cybersecurity leader's revenue rocketed 53% to $580.9 million. Meanwhile, free cash flow expanded 41% to $174.1 million, a remarkable 30% of its revenue. Those seem like impressive growth rates.
However, investors weren't impressed because they expected more. As a result, shares tumbled more than 15% after the company reported earnings and are now roughly 50% below their 52-week high. Here's a look at whether CrowdStrike's recent stumble is a buying opportunity or time to throw in the towel.
NASDAQ: CRWD
Key Data Points
Digging into the issue
CrowdStrike's fiscal third-quarter results came in slightly better than analysts expected. The company's $580.9 million in revenue was $5.8 million ahead of the analysts' consensus estimate. Meanwhile, its non-GAAP earnings of $0.40 per share beat expectations by $0.08 per share.
What caught investors off guard was an unexpected slowdown in new subscriptions. While the company's annual recurring revenue (ARR) has rocketed 54% over the past year to $2.34 billion, CrowdStrike only added $198.1 million of net new ARR in the quarter. That was below expectations due to increasing macroeconomic headwinds.
Unfortunately, things could get worse. CEO George Kurtz noted on the accompanying conference call:
Organizations were starting to respond to macroeconomic conditions by adding extra layers of required approvals and extending the time it took to close some deals. As Q3 progressed and fears of a recession grew, this dynamic became more pronounced.
We expect these macro headwinds to persist through Q4. Additionally, given the increased scrutiny on budgets, we're not going to expect a typical Q4 budget flush, leading us to adjust our Q4 net new ARR expectations.
Cause for concern, or only a speed bump?
Kurtz addressed the root causes of the slowdown on the third-quarter call. He pointed out: "In our smaller, more transactional non-enterprise accounts, we saw customers increasingly delay purchasing decisions with average days to close lengthening by approximately 11% and net new ARR contribution decreasing $15 million from Q2." He also stated, "while sales cycles lengthen, we believe the vast majority of these deals are not lost, just delayed."
Meanwhile, the CEO noted:
[Large customers] had to manage timing issues related to opex [operating expense] budgets and cash flow amid the rapidly evolving macro. To achieve this, some customers signed contracts that have multiphase subscription start dates, which pushes their expense and CrowdStrike's ARR recognition into future quarters. While every quarter we have some deals with multiphase subscription start dates, in comparison to last quarter, in Q3, we saw approximately $10 million more ARR deferred into future quarters.
While the company expects these headwinds to persist for at least the next quarter, Kurtz stated:
[It] does not deter our confidence in the long-term market position of CrowdStrike or the resiliency of the cybersecurity market. We see strong inherent demand for our products, and we entered Q4 with a record pipeline. Pipeline expansion is even more important in times of an evolving macro and elongated sales cycles.
The company continues to see a massive market opportunity for cloud security. It foresees a $76.1 billion total addressable market opportunity in 2023 that it expects will grow at a 13% compound annual rate over the next two years, reaching $97.8 billion by 2025.
The cybersecurity company believes it has a technological edge over its competitors, which should allow it to capture a growing share of this expanding market. Because of that, Kurtz said on the quarterly call: "[W]e remain steadfast in our vision to grow ending ARR to $5 billion by the end of fiscal year 2026 and reach our target operating model in fiscal year 2025." This statement suggests the company's recent slowdown is only a speed bump on the road to delivering its growth targets.
Growth on sale
The current economic uncertainty is causing companies to take a closer look at their spending, which impacted CrowdStrike's sales growth in its most recent quarter. While that issue could persist for a while, it won't derail the company's ability to achieve its long-term financial targets.
Because of that, the cybersecurity company's sell-off looks like a buying opportunity. Investors can get this fast-growing company for 50% off its peak price this year, even though its long-term growth remains on track.
