What happened
Shares of cybersecurity company CrowdStrike Holdings (CRWD 0.14%) surged by 33.4% in May, according to data provided by S&P Global Market Intelligence. That crushed the 0.25% return of the S&P 500, but I don't think investors should get excited about this stock performance in isolation.
So what
Normally when explaining why a stock is up or down in a given month, one can point to some concrete explanations. Sometimes, those are good explanations based on the fundamentals of the business. Other times, they may be based more on the fickle feelings of the market. In the case of CrowdStrike in May, I can't point to a business reason to explain why it was up so much. Indeed, there was no meaningful company-specific news during the month.
However, compare the performance of CrowdStrike stock to key competitor SentinelOne (S -0.10%), and you'll see that the two stocks had nearly identical returns during May. This suggests that investors were simply feeling better about cloud-based cybersecurity companies during the month. And feelings can influence stock prices over short time periods.
Now, CrowdStrike did technically deliver news related to its business fundamentals in May -- on May 31, it reported financial results for its fiscal 2024 first quarter, which ended April 30. However, the report came after the market closed that day, so it didn't contribute to its gains during the month.
Now what
I'll belabor this point because it's important for investors. Short-term gains don't always mean a business is doing well, and short-term declines don't necessarily mean the opposite. The cases of CrowdStrike and SentinelOne are instructive in this regard. Both companies reported financial results after their near-identical share-price performances for May were complete. But SentinelOne lowered its outlook while CrowdStrike raised its guidance.
CrowdStrike's revenue is generated from subscriptions to its software, making annual recurring revenue (ARR) a useful metric to track. The company's ARR reached $2.73 billion in fiscal Q1, an increase of 42% year over year. But that was slower growth than its 48% ARR growth in its fiscal 2023 fourth quarter.
The good news is that CrowdStrike's management believes its ARR growth will reaccelerate later in fiscal 2024. Management likes its pipeline of potential deals, and it's also optimistic about the adoption of some of its newer products. It also has a new partnership with Dell Technologies that could start yielding fruit later in the year.
I mention CrowdStrike's deal with Dell because I believe it's fitting in this context. Earlier this year, CrowdStrike hired Daniel Bernard away from SentinelOne to be its chief business officer. And CEO George Kurtz specifically credited Bernard with helping land the Dell partnership.
CrowdStrike and SentinelOne may have had essentially identical stock performances in May. But things like the Dell partnership lead me to believe CrowdStrike is outcompeting its rivals, which is why it's the company I prefer for the future.
