There's no doubt that CrowdStrike (CRWD 2.03%) has built a leading position in its corner of the cybersecurity market. The company is a go-to provider for software-based protections that prevent technology hardware from being used to exploit networks. On the other hand, investors seem split on what the business is worth, and its stock now trades down 55% from the high it reached in November 2021.
Does the valuation pullback present a worthwhile buying opportunity, or is CrowdStrike stock still too risky? Read on to see competing bullish and bearish takes on the cybersecurity specialist from two Motley Fool contributors.
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Bull: CrowdStrike is thriving and has huge growth potential
Keith Noonan: CrowdStrike is already the frontrunner in the endpoint cybersecurity market, and it's on track to continue benefiting from a powerful network effect. As more customers join its platform and encounter a wider range of threats, the company's AI-powered Falcon platform improves its ability to detect and protect against attacks. In turn, this helps increase the value of Falcon's offerings, which helps attract new clients.
CrowdStrike closed out the fourth quarter of its 2023 fiscal year, which ended Jan. 31, with more than 23,000 customers. Its total client count was up 41% compared to where it was at the end of the prior-year period, and carryover clients from Q4 2022 increased their spending 25.3% year over year on average.
Through its dual growth engines of new customer additions and net revenue retention, CrowdStrike's revenue soared 48% year over year in Q4 to hit $637.4 million. Strong sales growth and improving margins translated into a 58.5% year-over-year increase for non-GAAP (adjusted) net income, which came in at $111.6 million in the fourth quarter. For the full-year period, the cybersecurity specialist grew revenue 54% to reach $2.24 billion. Meanwhile, adjusted earnings per share skyrocketed 130% to $1.54, and free cash flow jumped 53% to $676.8 million.
Facing macroeconomic headwinds, CrowdStrike anticipates that annual sales growth will decelerate to approximately 34% this year, but it still expects adjusted earnings per share will rise 49%. That would still represent pretty strong performance, and investors shouldn't fixate too much on near-term challenges. Through organic growth, new product launches, and other catalysts, the company expects its total addressable market to jump from $76 billion this year to $158 billion in 2026. There's still huge growth potential here, and I think CrowdStrike stands out as a great buy for long-term investors.
Bear: The valuation profile comes with risk
Parkev Tatevosian: Admittedly, CrowdStrike is an excellent company in an industry with several years of expansion ahead. Cybersecurity has become an area businesses can no longer neglect. My argument against investing in CrowdStrike stock will focus on its expensive valuation. As of this writing, the shares are selling at a forward price-to-earnings ratio of 56.10 (see chart below). While this might be near the lowest they have traded for in several years, that figure is not cheap.
CRWD PE Ratio (Forward) data by YCharts
I sometimes like to compare stocks to rental properties to demonstrate a point regarding valuation multiples. Imagine a rental property that generates $100,000 annually in after-tax profit. Would you pay $5.6 million for it? The answer to that question might be that it depends on what rate you can increase the after-tax profits. Regardless, it would probably require a significantly above-average rent growth rate to justify a multiple of 56 times profits.
Similarly, CrowdStrike investors willing to pay 56 times next year's earnings would need to expect above-average growth to justify the premium price. From 2019 to 2023, CrowdStrike has only widened its operating losses, from $137 million to $190 million. Sure, sales increased from $250 million to $2.2 billion in that time, but sales are less lucrative if they are leading to more losses on the bottom line. I am not against paying premium valuations for excellent businesses. However, I have not seen enough evidence to justify paying the expensive valuation CrowdStrike's stock sports.
Is CrowdStrike stock a buy?
For risk-tolerant investors looking to build portfolio exposure to cybersecurity companies, taking a buy-and-hold approach with CrowdStrike stock at today's prices could lead to very strong returns. The company is a clear category leader in endpoint security services, it's growing sales and adjusted earnings at encouraging rates, and it still has plenty of room for expansion of the long term.
On the other hand, it's also clear that CrowdStrike has a highly growth-dependent valuation. Some strong growth is already priced into the cybersecurity specialist's stock, and shortfalls for the business or macroeconomic pressures could further depress its valuation. Accordingly, the stock might not be a great fit for more risk-averse investors or those who think that the company won't be able to maintain strength in its corner of the cybersecurity market.
