CrowdStrike (CRWD 1.34%) has been a market favorite in 2025. There's a lot to like. Its business performance has been strong, and demand for modern security, in general, remains robust. These factors, at least in part, help explain some of the stock's wild 57% year-to-date gain.
But because of a recent sell-off in the stock, this gain is much lower than it was in early July, when shares were up about 90% year to date. The stock's pullback from these levels comes as investors have had some time to digest the cybersecurity specialist's underwhelming revenue guidance for its fiscal second quarter. In addition, a breather was in order; putting pressure on the company to deliver, the stock's valuation is stretched after such a big run-up.
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Given the growth stock's high valuation, the company's disappointing guidance for its fiscal second quarter, and a few other risks, I believe shares have more room to fall. Investors, therefore, may want to think twice before buying the stock ahead of CrowdStrike's Aug. 27 earnings report.
What the most recent quarter really said
CrowdStrike's first quarter of fiscal 2026 (the three-month period ended April 30, 2025) delivered solid top-line growth. But the numbers weren't explosive -- and that may be a problem, given the stock's valuation.
Revenue rose 20% year over year to $1.10 billion, far below the 29% year-over-year growth it delivered shareholders for the full year of fiscal 2025. The company's fiscal first-quarter growth was supported by a 20% increase in subscription revenue to $1.05 billion. Trailing-12-month recurring revenue (ARR) reached $4.44 billion, up 22% from a year ago, with $193.8 million in net new ARR added during the quarter.
Cash generation pulled back. Free cash flow was $279.4 million, down from $322.5 million in the year-ago period. The key metric was negatively affected by $61 million in expenses related to an outage on its platform last summer.
Further, guidance was concerning. For fiscal Q2, CrowdStrike projected revenue of $1.14 billion to $1.15 billion. The midpoint of this guidance range assumes about 19% year-over-year growth -- even slower than the 20% growth the company posted in fiscal Q1.
Risks in the face of a frothy valuation
Even after the recent dip, the stock's valuation is extremely demanding. Shares trade at more than 100 times forward earnings and about 25 times sales. To live up to a valuation like this, top-line growth rates should stay in the twenties, and free cash flow should trend upward. Such a frothy valuation ultimately leaves little cushion if ARR growth slows, margins tighten, or guidance disappoints again.
Competition is another risk that can pressure CrowdStrike's win rates or pricing over time. Deep-pocketed competitor Microsoft, for instance, continues to bundle advanced security across its Microsoft 365 E5 stack, which includes endpoint security solutions. This means that for customers already paying for E5, the incremental cost of endpoint security can be close to zero -- a tough competitor when companies are trying to optimize their tech stacks.
Don't buy the dip
CrowdStrike is a category leader with a terrific platform. The long-term story remains attractive. But, at the moment, the stock is priced for near-flawless execution despite recent challenges. Fiscal Q1 showed steady growth but not acceleration, guidance was unimpressive, cash flow eased, and Microsoft's bundling is a headwind on pricing power.
With earnings on Aug. 27, the risk-reward looks tilted to the downside if management doesn't deliver clear reacceleration and provide robust guidance. For prospective buyers of the stock, therefore, patience may pay off. Meanwhile, shareholders should be cautious about their position sizing. At this valuation, even small disappointments can lead to big sell-offs.
