When CrowdStrike Holdings (CRWD 0.13%) reported earnings on Nov. 29, the stock imploded, closing 15% lower the following day, as investors were disappointed in the company's lackluster growth expectations. This seemingly invincible stock of the last several years met its kryptonite in 2022. It is down 42% year to date, sitting near its 52-week low. So you might wonder if buying this stock after its most recent pounding is worthwhile.
If you are a long-term investor, you should buy this stock today. Here's why.
Why did investors push the sell button on CrowdStrike?
Before understanding why you should buy, you should learn why investors frantically sold the stock, despite it beating analysts' consensus revenue and earnings estimates.
CrowdStrike is a subscription business, and two crucial metrics that give investors solid predictive insights into the health of subscription businesses are annual recurring revenue (ARR) and net new ARR (NNARR).
ARR measures how much recurring revenue a business will receive from customers over the subsequent year. Typically, analysts use ARR to predict a company's growth.
Image source: CrowdStrike.
NNARR is even more critical. It can help measure whether a company's projected growth is healthy or at risk.
On the fiscal third-quarter 2023 earnings call, CEO George Kurtz said that increased macroeconomic headwinds caused its NNARR to decrease below company expectations. And after investors analyzed the company's ARR in conjunction with the NNARR, the analysis indicated CrowdStrike's future ARR growth would decelerate more rapidly than desired -- terrible for a growth stock. Even worse, the company projects that NNARR will continue to deteriorate well into the 2023 calendar year.
Why are ARR and NNARR deteriorating?
Headwinds from high inflation and rising interest rates have caused smaller CrowdStrike customers to delay purchasing decisions. For example, the average days to close a deal for small non-enterprise customers have lengthened by approximately 11% in the third quarter. These same headwinds have also impacted larger customers. Fearing a possible recession in 2023, large enterprises are signing contracts with multiphase subscription start dates. These decisions by smaller and larger customers harm CrowdStrike by pushing NNARR and ARR recognition into future quarters.
Short-term investors responded to the bad news by quickly disposing of their shares.
Why you should push the buy button on CrowdStrike
However, the excellent news for investors is that although customers have delayed revenue recognition, demand for its cybersecurity services remains high. Cybersecurity is mission-critical for all companies; any company that can't prevent security breaches won't stay viable for long. Consequently, the necessity for a service to protect against breaches drives high demand for CrowdStrike's services, resulting in substantial revenue and free cash flow growth. For example, the company grew revenue by 53% in the fiscal third quarter of 2023. In addition, it is generating gobs of free cash flow (FCF), $174 million, with a 29.97% FCF margin. That's a solid performance in this current environment.
CRWD Revenue (Quarterly) data by YCharts
Businesses adopting cloud computing serves as an additional tailwind driving high demand for its platform.
Research company MarketsandMarkets projects the global cloud market to grow at a compound annual growth rate of 17.9% between 2022 and 2027 to $1.2 trillion. And CrowdStrike is in a great position to continue gaining business from companies adopting cloud computing since many consider it the best cloud security platform. For example, it won the best technology solution for cloud security from technology news company CRN in 2021.
The best part is that CrowdStrike should come out of this down market more dominant than ever because this terrible economy is even more destructive to many up-and-coming competitors.
While many private cybersecurity companies have made significant layoffs in anticipation of a recession in 2023, CrowdStrike has increased its employee base by 40% so far this year, putting the company in an excellent position to achieve its goals in 2023. Moreover, with so many smaller cybersecurity companies struggling, it offers enticing opportunities to purchase companies with exciting new technology or to hire quality employees. And CrowdStrike has $2.5 billion in cash to make it happen.
Although no one likes a recession, strong companies often grab more market share in difficult times, and weaker competitors frequently fall by the wayside.
As of the third quarter of the calendar year 2022, the company has a 2.7% share of its 2023 total addressable market of $76.1 billion, so it has plenty of room to grow in an expanding marketplace.
Image source: CrowdStrike.
While many believe that it sells at a high valuation with a price-to-sales ratio of 13.1, you should remember that Wall Street has always placed a premium on CrowdStrike's subscription business model. Once the economy rebounds, revenue growth will reaccelerate and its valuation should bounce higher with a vengeance.
