CrowdStrike (CRWD 3.86%) posted its latest earnings report on Nov. 28. For the third quarter of fiscal 2024, the cloud-based cybersecurity company's revenue rose 35% year over year to $786 million and topped analysts' estimates by $9 million. Its adjusted earnings per share (EPS) more than doubled to $0.82 and cleared the consensus forecast by $.08.
Those headline numbers were impressive, but does CrowdStrike's stock still have room to run after rallying more than 50% over the past 12 months? Let's see where this growing cybersecurity company might be headed over the next year.
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A quarter of slower but stabilizing growth
CrowdStrike's cloud-native platform Falcon provides its endpoint security tools as cloud-based services. It doesn't use any on-site appliances which take up space, require constant maintenance, and are expensive to scale as an organization grows.
CrowdStrike's early-mover advantage in the cloud-native cybersecurity market enabled it to grow rapidly since its initial public offering (IPO) in 2019. From fiscal 2020 to fiscal 2023 (which ended in January 2023), its revenue rose at a compound annual growth rate (CAGR) of 67%, while its annual recurring revenue (ARR) grew at a CAGR of 62%.
But over the past year, its growth decelerated on financial metrics like ARR, net new ARR added each quarter, and total revenue. That slowdown was mainly caused by the macroeconomic headwinds, which drove many companies to rein in their spending on big software deals.
|
Metric |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
Ending ARR Growth (YOY) |
54% |
48% |
42% |
37% |
35% |
|
Net New ARR Growth (YOY) |
17% |
2% |
(8%) |
(10%) |
13% |
|
Revenue Growth (YOY) |
53% |
48% |
42% |
37% |
35% |
Data source: CrowdStrike. YOY = Year over year.
CrowdStrike's growth in ARR and total revenue decelerated again in Q3, but its net new ARR growth turned positive again after two quarters of declines. That recovery, which matches CEO George Kurtz's prior outlook for "double-digit net new ARR growth" in the second half of fiscal 2024, indicates the company is still squeezing more revenue from its new and existing subscribers in this challenging economy.
CrowdStrike attributed its accelerating growth in net new ARR to its market-share gains, acquisitions of new U.S. government clients, and the expansion of its AI-powered XDR (extended detection and response) platform. The rollout of its AI-native XDR tools should widen CrowdStrike's moat against AI-native challengers like SentinelOne and diversified leaders like Palo Alto Networks, which are gradually expanding into the AI market.
That acceleration is also reflected in its rising module adoption rates. CrowdStrike's customers start with four cloud-based modules with an option of adding more modules for specific purposes. In Q3, 42% of its subscription customers had adopted at least six of its modules, compared to 36% of its customers a year earlier. The percentage of its customers who were using at least seven modules rose from 21% to 26%.
CrowdStrike expects its revenue to rise 31% to 32% year over year in Q4 and 36% for the full year. Both of those estimates comfortably surpassed Wall Street's expectations.
NASDAQ: CRWD
Key Data Points
Expanding margins and rising cash flows
CrowdStrike is still growing at a slower clip in this tough market, but its adjusted subscription-gross margin still rose year over year from 78% to 80% in the first nine months of fiscal 2024. Its adjusted operating margin expanded from 16% to 20% even as it ramped up its sales, marketing, and R&D spending. During the conference call, CFO Burt Podbere said the company would "continue to invest aggressively in innovation and growth while exceeding our profitability expectations."
Its stabilizing revenue growth and rising margins lifted its free cash flow (FCF) by 40% year over year to $655 million in the first nine months. It also turned in its third consecutive quarter of profitability on a generally accepted accounting principles (GAAP) basis as it reined in its stock-based compensation expenses.
CrowdStrike expects its adjusted EPS to rise 72% to 74% year over year in Q4 and 92% for the full year, which was higher than its prior outlook for 82% to 84% earnings growth. Both of those forecasts surpassed analysts' expectations.
Where will CrowdStrike's stock head in a year?
CrowdStrike's stock might seem a bit pricey at nearly 60 times forward earnings, but its dominance of the cloud-native cybersecurity market, robust growth rates, rising margins, and soaring profits all justify that premium valuation. Palo Alto Networks, which is growing at a much slower rate, trades at about 50 times forward earnings.
CrowdStrike should continue expanding over the next year, and the stabilizing macroenvironment should drive more bulls back to its stock. Therefore, I believe its shares will rally higher and outperform the market over the next 12 months.
