What happened
Crowdstrike's (CRWD 1.58%) quarterly revenues and earnings generally exceeded analysts' consensus estimates last year, but the cybersecurity stock still dropped by 48.5%. The company struggled with slowing growth and rising interest rates -- factors that sapped investors' appetites for risk. Growth stocks broadly suffered as a result.
What happened
CrowdStrike published mostly good news last year. The company's revenue growth rate was above 50%, and it outpaced Wall Street's projections each quarter. In its most recently reported quarter, it produced $174 million in free cash flow, a company record. High growth and strong cash generation are a rare and bullish combination, especially as other industries show signs of weakness.
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Despite all of that good news, investors focused on some of CrowdStrike's less encouraging data. While its growth remains high, it has slowed by 10 percentage points from earlier in the year. Even if the rate of expansion is impressive, a stock's price usually drops when management revises its forecasts downward.
There are early indicators of tougher times ahead, too. CrowdStrike's new bookings came in below expectations last quarter, so it will be fighting an uphill battle to maintain its high growth rate over the next year. That was reflected in the company's most recent full-year forecast, which left investors unimpressed.
CrowdStrike attributed its bookings struggles to an elongating sales cycle and financial weakness among small and medium-sized businesses. Cybersecurity has become a necessary function for any modern business, but it appears that global economic weakness is impacting the industry right now. Corporate budgets are getting a bit tighter, and businesses are slowing their investments. As businesses become less willing to part with cash, high-growth vendors like CrowdStrike are struggling to expand at the same breakneck paces they were able to maintain in 2021.
The stock's previously aggressive valuation set it up for its declines throughout 2022. Even though the company's results were mostly positive, there was no margin for error because the stock was so expensive. As CrowdStrike's growth outlook deteriorated, its price-to-sales ratio dropped from 32 to 12. CrowdStrike is also now near its all-time lows relative to forward earnings and cash flow.
Now what
CrowdStrike's revenue growth is likely to slow in the coming quarters, and the stock market will continue to face headwinds as long as interest rates are high. That's a bad combination for tech stocks like CrowdStrike. Absent a radical shock to the market and the global economy, it's unlikely that it will claw back all of its 2022 losses in 2023.
Long-term investors shouldn't give up hope, though. CrowdStrike is expected to expand faster than the tech sector average. It occupies a leadership position in endpoint protection -- a service that should remain in high demand for years to come. Its forward price-to-earnings ratio is nearly 50, but that's not particularly high when compared to its forecast growth rate. The valuation leaves room for long-term returns. Just be prepared for short-term volatility along the way.
