What happened
CrowdStrike (CRWD 2.03%) rose 39.5% over the first six months of 2023, according to S&P Global Market Intelligence. This far outpaced the S&P 500 as well as popular cybersecurity ETFs, and it slightly edged the Nasdaq Composite over that period. The company capitalized on stronger-than-expected quarterly earnings reports. The stock also benefited from improving market conditions for growth stocks and the cybersecurity sector, which helped CrowdStrike and some of its peers recover from a rough 2022.
So what
It's important to understand the context for CrowdStrike and its peers entering this year. The stock dropped more than 50% in 2022 thanks to high interest rates and slowing growth. Many high-growth stocks had charged to unsustainably high valuations during the pandemic, and they crashed back to earth as conditions reversed.
Image source: Getty Images.
CrowdStrike's rebound this year has been caused by several factors, including financial results, improved outlook, and valuation inflation. The company reported nearly 50% revenue growth in its March quarterly earning report, and it topped Wall Street's estimates for revenue, profit, and updated forecasts. It followed that up with 42% revenue growth in its May quarterly report. This beat analyst expectations, but the slowdown still triggered a sell-off.
Even with those mixed results, CrowdStrike's medium-term outlook has improved since the start of the year. Analyst forecasts for revenue and profits both climbed higher.
CRWD Revenue Estimates for Next Fiscal Year data by YCharts.
Investors have grown more optimistic about the Federal Reserve's policies along with economic conditions in general. This is creating favorable conditions for growth stocks that require investor risk appetite. There's also been renewed optimism regarding the cybersecurity industry. Zscaler's (NASDAQ: ZS) bullish announcement in May helped send the whole sector higher, and CrowdStrike's subsequent retreat only gave back some of those gains. Fears that high interest rates would trigger a deep recession have been dulled so far this year, and high-growth stocks have clawed back some of last year's losses as a result.
That improved optimism also fueled valuation expansion for CrowdStrike, which grew more expensive relative to the revised earnings and revenue forecasts.
CRWD P/E Ratio (Forward) data by YCharts.
Now what
CrowdStrike is entering a bit of a transition period. It's still unequivocally a growth stock, but it's likely to maintain the trends of slowing growth and improving cash flows.
CRWD Free Cash Flow data by YCharts.
It's difficult to maintain a 50% revenue growth rate -- the company added roughly $600 million in revenue from 2021 to 2022, then $800 million from 2022 to 2023, but the rate of expansion declined. That's part of the corporate maturation process, and the stock is likely to remain volatile as investors determine CrowdStrike's realistic cash flow potential in the coming years.
As it stands, the stock has excellent prospects, but it commands a premium valuation. It's still growing faster than the vast majority of publicly traded companies, and it's producing cash. Its 125% net revenue retention rate demonstrates customer satisfaction, improved product offering, and effective sales practices. That's good for long-term investors, but you'll have to absorb a forward price-to-earnings ratio above 60 -- and the high volatility that comes along with that -- to buy it today.
