CrowdStrike (CRWD 3.86%) issued its latest earnings report on Aug. 30. For the second quarter of fiscal 2024, which ended on July 31, the cloud-based cybersecurity company's revenue rose 37% year over year to $732 million and surpassed analysts' estimates by $7 million. Its adjusted net income surged 110% to a record high of $180 million, or $0.74 per share, which cleared the consensus forecast by $0.18 per share.
On a generally accepted accounting principles (GAAP) basis, CrowdStrike squeezed out a net profit of $8.5 million, compared to a net loss of $49 million a year earlier. That also marked its second consecutive quarter of GAAP profitability.
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Those headline numbers were impressive, but CrowdStrike's stock only ticked up modestly after the report and it remains nearly 50% below its all-time high. Should investors accumulate more shares of this former market darling before the bulls rush back?
Another quarter of decelerating sales growth
Most traditional cybersecurity companies install on-site appliances to run their security services. But those devices are expensive, take up a lot of space, and require constant maintenance. CrowdStrike addresses those common complaints with Falcon, an endpoint security platform that entirely replaces on-site appliances with cloud-native services.
CrowdStrike's disruptive approach enabled it to grow like a weed since its IPO in 2019. Between fiscal 2020 and fiscal 2023 (which ended in January 2023), its revenue increased at a jaw-dropping compound annual growth rate (CAGR) of 67%. Its annual recurring revenue (ARR) rose at a CAGR of 62% during the same period. But over the past year, its growth in ARR, net new ARR added each quarter, and total revenue cooled off.
|
Metric |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Ending ARR growth (YOY) |
59% |
54% |
48% |
42% |
37% |
|
Net new ARR growth (YOY) |
45% |
17% |
2% |
(8%) |
(10%) |
|
Revenue growth (YOY) |
58% |
53% |
48% |
42% |
37% |
Data source: CrowdStrike. YOY = year over year.
Like many of its cybersecurity peers, CrowdStrike blamed its slowdown on the macroeconomic headwinds that drove many businesses to rein in their software spending. Its declining net new ARR in the first half of fiscal 2024 also indicates it's struggling to squeeze out more subscription revenue from its new and existing customers.
A brighter outlook for the rest of the year
But during the conference call, CEO George Kurtz said CrowdStrike could generate "double-digit net new ARR growth" in the second half as it brings in "record levels of customers" and benefits from "substantial changes in the competitive landscape." CFO Burt Podbere said even though the macro environment was "tough," he was "adamant" its growth rates would stabilize.
CrowdStrike is also still driving its existing customers to adopt more of its cloud-based modules. About 41% of its subscription customers adopted at least six of its modules, compared to just 36% of its customers a year ago. Its percentage of customers using at least seven modules rose from 20% to 24%.
It expects revenue to rise 33%-34% year over year in the third quarter and 35%-36% for the full year. That would represent a slowdown from its 54% growth in fiscal 2023, but it also exceeds Wall Street's forecast for a 35% gain.
NASDAQ: CRWD
Key Data Points
Focusing on its margins and profits
CrowdStrike's sales growth might be cooling off in this challenging market, but its adjusted subscription gross margin still expanded by a percentage point year over year to 80% in the first half of fiscal 2024. Its adjusted operating margin also rose from 17% to 19%. Those expanding margins suggest CrowdStrike still has plenty of pricing power, that it can afford to rein in its own spending, and that economies of scale are kicking in.
Its stock-based compensation (SBC) expenses also grew at a slower pace than its total revenue in the first half of fiscal 2024. That disciplined SBC spending enabled it to remain profitable on a GAAP basis over the past two quarters, and its free cash flow (FCF) grew 42% year over year to $416 million in the first half of the year.
CrowdStrike expects its adjusted EPS to rise 85% year over year in the third quarter and 82%-84% for the full year. Both of those estimates easily exceeded Wall Street's expectations.
The valuation and verdict
At $150, CrowdStrike stock trades at 53 times its adjusted EPS forecast for fiscal 2024. Palo Alto Networks and Fortinet, which are both growing slower, trade at 45 and 40 times forward earnings, respectively.
Therefore, I believe CrowdStrike still looks reasonably valued relative to its near-term growth. It's not cheap, but its first-mover advantage in the cloud-native cybersecurity space, rising module adoption rates, and expanding margins all justify its higher valuation. Its stock probably won't blast off right away, but it's still a great growth play for long-term investors.
