Is It Too Late to Buy CrowdStrike Stock?

CrowdStrike's (CRWD 3.63%) stock price dropped 12% during after-hours trading on May 31 following its latest earnings report. For the first quarter of fiscal 2024, which ended on April 30, the cloud-based cybersecurity company's revenue rose 42% year over year to $693 million and exceeded analysts' estimates by $16 million. Its adjusted net income grew 82% year over year to $136 million, or $0.57 per share, which also cleared the consensus forecast by $0.07.

Those headline numbers seemed solid, but they failed to bring the bulls back to its burnt-out stock -- which remains more than 50% below the all-time high it hit in November 2021. Is it too late to buy some shares of this high-growth cybersecurity company?

Image source: Getty Images.

How rapidly has CrowdStrike been growing?

Unlike many older cybersecurity companies, CrowdStrike doesn't run its services on on-site appliances -- which are costly, take up lots of space, and are difficult to scale as an organization expands. Instead, it operates a cloud-native platform, which can be accessed remotely without any on-site appliances.

That innovative approach enabled CrowdStrike to grow like a weed. Its revenue surged 93% in fiscal 2020 (which ended in January 2020), 82% in fiscal 2021, 66% in fiscal 2022, and 54% in fiscal 2023. Its total number of subscription customers grew from 5,431 at the end of fiscal 2020 to 23,019 at the end of fiscal 2023.

But as it grew, its valuations soared along with the market's expectations. At its peak, CrowdStrike's enterprise value reached $66 billion -- or 29 times the revenue it would eventually generate in fiscal 2023. It now has an enterprise value of $29 billion -- or 10 times its projected sales for fiscal 2024. For reference, Palo Alto Networks, which has been growing at a slower rate than CrowdStrike, trades at 9 times this year's sales.

Why did the bulls abandon CrowdStrike?

CrowdStrike's valuations declined because its growth rates decelerated. Its growth can be gauged by its ending annual recurring revenue (ARR), which gauges its year-over-year growth in subscription revenue over the past 12 months, and its net new ARR, or the amount of new ARR added during the quarter. Both growth rates decelerated over the past year.

Data source: CrowdStrike. YOY = Year over year.

During the conference call, CrowdStrike CFO Burt Podbere blamed that slowdown on a "challenging macro environment," and he doesn't "see the macro improving now and for the rest of the year." The company expects its revenue to only rise 34% to 36% year over year in both the second quarter of fiscal 2024 and the full fiscal year.

That slowdown isn't disastrous, but it's disappointed a lot of investors who had grown accustomed to CrowdStrike's breakneck growth rates. During its investor day earlier this year, CrowdStrike predicted its ARR would nearly double from $2.56 billion in fiscal 2023 to about $5 billion in fiscal 2026. But to hit that target, it would only need to grow its ARR at a CAGR of about 25% -- which would be significantly slower than a CAGR of 62% for its ARR from fiscal 2020 to fiscal 2023.

Its margins are stable, and its adoption rates are rising

CrowdStrike's revenue growth is cooling off, but its adjusted gross margin still expanded year over year to 80% in the first quarter, while its adjusted operating margin held steady at 17%. Those rising gross margins indicate it still has plenty of pricing power in the crowded cybersecurity market, and it's maintaining stable operating margins without executing any mass layoffs. Instead, it merely plans to hire fewer people this year and rein in its spending.

CrowdStrike also continues to lock in customers with its "land and expand" strategy of providing companies with a starter pack of four cloud-based modules to cross-sell additional modules. At the end of the first quarter, 62% of its customers were using five or more modules, compared to 59% of its customers a year earlier, while its ratio of customers using six or more modules rose from 35% to 40%.

CrowdStrike expects its adjusted EPS to rise 50% to 58% year over year in the second quarter, and to grow 50% to 57% for the full year. At $143 per share, CrowdStrike still looks a bit pricey at 60 times the midpoint of its full-year earnings forecast. Palo Alto, which is expected to generate stronger earnings growth than CrowdStrike for its current fiscal year, looks a bit cheaper, at 45 times forward earnings.

It's not too late to buy CrowdStrike

CrowdStrike's stock might seem a bit expensive, but the company still has plenty of room to grow as it disrupts legacy cybersecurity companies with its cloud-native services. It would have been a bad idea to chase CrowdStrike back in late 2021, but it now looks more reasonably valued relative to its long-term growth potential.

Therefore, it's not too late to buy CrowdStrike -- even if its stock remains volatile over the next few quarters.