CrowdStrike Holdings (CRWD +8.09%) stock has made a remarkable recovery on the market in the past six months following a faulty software update on July 19 last year that caused a global IT outage and sent its shares plummeting.
The outage hit millions of computers around the globe, affecting airlines, hospitals, stores, and other businesses. Not surprisingly, CrowdStrike stock suffered a crisis of confidence, as investors were worried about the cybersecurity specialist's ability to attract new customers in the wake of this setback. Additionally, CrowdStrike was embroiled in legal tussles following the outage.
NASDAQ: CRWD
Key Data Points
The impressive rally in CrowdStrike stock over the past six months suggests that the company has regained investor confidence. However, will it be a good idea to buy it following this surge? Let's find out.
CrowdStrike's recent results indicate that it's still feeling the outage's effect
CrowdStrike management decided to compensate customers following the July 19 incident. The customer commitment package announced by the company included the extension of subscription contracts, flexible payment terms, and other one-time incentives. CrowdStrike also witnessed a 15% year-over-year extension in its sales cycles with enterprise customers.
The company's annual recurring revenue (ARR) was affected to the tune of $25 million in the third quarter of fiscal 2025 (which ended on Oct. 31, 2024) on account of the compensation packages. CrowdStrike is anticipating a bigger effect of $30 million on its net new ARR and subscription revenue in the fiscal fourth quarter.
CrowdStrike management points out that the company has "already worked through a significant number of compensation packages, with the remainder to be concluded in the upcoming quarters." The compensation packages are also having a negative effect on CrowdStrike's bottom line.
CRWD EPS Diluted (Quarterly) data by YCharts.
The company has guided for fiscal 2025 adjusted earnings of $3.75 per share at the midpoint, which would be a 21% jump from the previous year. That points toward a significant slowdown in growth from fiscal 2024, when its earnings doubled. Consensus estimates are projecting a further slowdown in earnings growth next year, while the forecast for the year after that has been reduced as well.
CRWD EPS Estimates for Next Fiscal Year data by YCharts.
All this indicates that CrowdStrike could continue to feel the aftereffects of last year's incident for the foreseeable future. That's exactly why buying the stock following its recent surge may not look like a good idea, especially considering the valuation.
The stock is richly valued right now
CrowdStrike is trading at a whopping 801 times trailing earnings and 94 times forward earnings. The sales multiple of 27 isn't cheap, either. Buying CrowdStrike at such expensive multiples, especially when its bottom line is feeling the squeeze of compensation packages, won't be the smartest thing to do, as the stock seems to have gotten ahead of itself.
Even its 12-month median price target of $385 is lower than the current stock price. However, if CrowdStrike stock undergoes a correction and becomes available at a cheaper valuation, it may be worth a look once again.
That's because CrowdStrike sees its total addressable market hitting $250 billion in 2029, thanks to the growing adoption of artificial intelligence (AI) tools within the cybersecurity space. The company has rolled out a number of AI-focused offerings for customers that seem to be gaining traction, per management's comments on the November 2024 earnings conference call.
Additionally, the adoption rates of CrowdStrike's cybersecurity modules have been improving. It's worth noting that 66% of its customers were using five or more modules at the end of the third quarter of fiscal 2025, up by three percentage points year over year. CrowdStrike's ability to drive an improvement in the adoption of its cybersecurity offerings despite last year's incident suggests that it is successfully navigating the challenges and is positioning itself for long-term growth.
The company expects to increase its ARR to $10 billion over the next six years, which would be a 2.5x increase over its ARR in the last reported quarter. So, even though CrowdStrike may not be worth buying now on account of its expensive valuation and slow earnings growth, investors can still consider adding this cybersecurity stock to their watchlists.
Any sharp correction in CrowdStrike stock that brings its valuation to more reasonable levels, or a strong enough improvement in its earnings growth that could help justify its multiples, could represent a signal to buy in the future.
