A scummy downgrade

Morgan Stanley initiated coverage today of CrowdStrike at underweight (aka Sell), due to “growing signs of increased competitive and pricing pressure likely making share gains more difficult”, and that “CrowdStrike’s early leadership position is now increasingly challenged by more competitive next-gen EDR alternatives that are narrowing the functionality gap and offering price points typically at least 15-20%+ less expensive.”

Aka they are valued too high, and competition is coming for them by undercutting pricing in deals. Nothing new here – this has been the case since CRWD’s IPO, in fact.


Morgan Stanley was one of the lead underwriters of the Sentinel One IPO in June.

In July, those underwriters exercised their right to buy 5.25M shares from the IPO. https://www.sentinelone.com/press/sentinelone-announces-unde…

In tandem with all that, Morgan Stanley initiated overweight (aka Buy) on Sentinel One.

So they don’t seem to mind the way tinier upstart (that they own) being valued as one of the top most expensive stocks in the SaaS (way above CrowdStrike) in this same highly competitive market.


BTIG earlier this month downgraded to Neutral on fears of Sentinel One rising as competition.

Mizuho today however, said the opposite on CrowdStrike, and maintained their Buy rating with target raise from $315 to $360.


Luckily, we now have Sentinel One as a public company, and can easily trace how they are doing. They seem to be capturing smaller customers, as CrowdStrike is growing ARR way more for its cust growth rate. Last Q, CRWD added +1660 costs, S added +600 custs. CRWD added $150.56M net new ARR, S added $36.68M net new ARR.

As Saul mentioned in the past, Sentinel One is operationally disappointing: https://boards.fool.com/sentinel-one-8211-a-thought-experime…

  • muji
    … who normally doesn’t give a crap about sell-side ratings, but wanted to note how the company in today’s downgrade has direct business with and shares in the main competition

MS’s exercise to buy 5MM shares is the underwriter’s green shoe / overallotment allocation. Since Sent One closed up 21% on it’s debut, these shares went sold, at the IPO price, to institutions who placed orders for the offering. This is normal course of business for all public equity offerings. MS did not retain those shares.


Thanks to Muji for posting this. I took a look at the 41-page report.

Summary (I’ll summarize the thesis and give some supporting detail on the bottom)

Price target is $247 based on 45x CY27e FCF of $2.0B discounted back at 8.5% WACC. Assumptions – total customers reach 60.0k in CY27, a 21% 5yr CAGR. ARR is $5,739M, a 21% CAGR. Rev grows to $5,548 in CY27 (23% 5yr CAGR). Op Margin improves from 7% in CY20 to 27% in CY27 (ARR = Annual Recurring Revenue)

There are 3 key issues:
1.) Increased competition in the space (Sentinel One and Microsoft are primary competitors) driving pricing pressures. Legacy vendors doing a better job defending turf (Symantec/McAfee)
2.) Post-covid headwinds in number of End Points
3.) Emerging opportunities in XDR (Extension, Detection, and Response) are real but nascent (and will likely be a couple of years until it’s material to CRWD)

They readily admit the thesis is wrong if Security spending remains strong and if XDR happens faster (TAM for XDR is estimated at >$40B in CY2025)

----------(end summary)---------------------------

The conclusions are based on a VAR survey (75% of Sales are made through channel partners) and a Chief Security Officer Survey (CSO)

Survey responses suggest more pricing discussions are occurring while capability gap is shrinking. Example - Sentinel One list price per end point per month is $12 vs $16 for Falcon complete (paraphrased and considered like-products)

Crowdstrike currently has 9% marketshare (Symantec and McAffee have 15%). Projection is that by 2025 Crowdstrike will have 25% share with Sym/McA at 5% and Sentinel One at 8%. Crowdstrike is projected to take half of all the Sym/McA share losses.

In the CSO survey, 55% of CSO’s had no plans to deploy XDR in the next 12-36 months. 22% were not aware of XDR. (the other 23% are either deploying or planning to deploy)

In the VAR survey (n=20), from Oct 20 to Oct 21, Crowdstrike’s expected share gain drops from 50% to 45% while Sentinel One’s goes from 0% to 10%. The respondents also said that spend on End Point will decrease from 65% to 55% (notable is that Identity Management/Single Sign on is slated to go from 10% to 35%)

In a 2015 study, the projected Endpoint Market from ’16 to ’19 was to grow from $4.2B to $4.9B. The ACTUAL number was $7.2B and in 2020 it was $8.2B. Growth for next year is projected at 10% CAGR.

ARR per customer has decreased from $124K in CY19 to $106K in CY21 as the company went down market. (an indicator of price pressures)


“ARR per customer has decreased from $124K in CY19 to $106K in CY21 as the company went down market. (an indicator of price pressures)”

On their recent investor call they specifically commented how easy it has been for them to go down market with low touch/no touch enrollment thru their website. I don’t understand why this would indicate any price pressures in that segment, quite to the contrary. Their pricing is very transparent. Small and medium business are far less likely to negotiate pricing and far more likely to roll out their products with minimal effort on the part of Crowdstrike. If they are enrolling thru their website, they must be quite happy with the pricing.