Cloudflare vs. Crowdstrike revenue growth

Investment Analysis Clubs Saul’s Investing Discussions
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I was curious as to why there’s so much love for Cloudflare who is growing “just at 50-55%” vs. Crowdstrike that is growing 60%+ albeit decelerating. Granted Cloudflare’s revenue is slightly accelerating, but their sequential revenue growth from a % perspective is comparable to Crowdstrike’s and their annual growth rate is still lower than Crowdstrike’s.

In calendar year 2022, Crowdstrike and Cloudflare should both grow revenue by 50%+. This is a big deceleration from Crowdstrike’s 80%+ but still respectable and it only has a TTM multiple of 30 versus Cloudflare who may do 50% again has a multiple of 60. So while Crowdstrike may continue to decelerate in their revenue growth, it’s still growing at a solid rate and it can be argued may be higher than Cloudflare’s for at least 2022, if not also 2023.

Plus, Crowdstrike’s business fundamentals are very compelling, yes, they’re more mature than Cloudflare, but apparently the market is okay giving out 30+ multiples to serial compounders with strong FCF margins (i.e. $TEAM).

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I’d recommend that you study further NET, Peter Offringa and Muji have great coverage in their respected services:

https://softwarestackinvesting.com/

https://hhhypergrowth.com/

The short answer here: TAM scalability and future product expansion, optionality, network effects, bottom up and top down GTM motion, etc. There are very few (if any) companies that come close to the potential of NET for future compounded growth and future TAM expansion than NET - from the ones being followed on this board and in general. There is no easy way to put a valuation on NET - since there are not that many similar companies to compare to.

Long answer is to review the earning transcript and all articles published on the above 2 sites.

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I was curious as to why there’s so much love for Cloudflare who is growing “just at 50-55%” vs. Crowdstrike that is growing 60%+ albeit decelerating.

I think it’s pretty clear, if we were to pick a #1 most important metric it would likely be revenue growth. Or would it?

Upstart grew 249% YoY last quarter. Why wouldn’t it be my #1 position? Because current revenue growth isn’t everything. You have to look at the whole picture, paying attention to how things are trending, and make guesses. That’s what “following the numbers” is. It’s not just looking at how much revenue grew last quarter. Durability of revenue growth is far more important.

I bolded “albeit decelerating” in your sentence above because I think those are the most important words. That is what I’m watching like a hawk, and trying to guess how it trends in the future. And I might very well be wrong, but I think CRWD will continue to slow, and NET might accelerate or at least stay steady. This is everything.

I hope that helps. It helps me to remember there is some guessing involved in what we do. We follow the numbers as best we can, but we don’t know the future. But the future is what matters – so we make the most educated guesses we can, based on how the numbers are trending.

Maybe instead of “follow the numbers” we should say “follow the trend.” It’s closer to what I do, anyway.

Bear
no position CRWD
less than 1% position NET (I like it, but I like others more)

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See this financial map as an example of how to look at a broader set of key business metrics and to follow the trends within them.

https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_p…

YOY
QOQ
%beat
Trends over 6-8 quarters
Discounting for one-off events like COVID quarters
etc…

It takes a bit of effort to do this level of analysis, but it leads to better-informed decisions

Beachman @iwannabeontheb2
Long NET and CRWD

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Durability of revenue growth is far more important.

This is where I tend to disagree with the characterization that CRWD’s revenue growth is somehow less durable than NETs and why I maintain a 14% position in CRWD an no position in NET.

Net has been largely steady in revenue growth YoY for the past 3 years, oscillating between 47% and 54% (yes they hit 54% this Q but let’s not act like its been in a straight line historically).

As RunnerGuy pointed out, CRWD is P/S(TTM)=32 and NET is P/S(TTM)=57 as of today, so you’re paying almost DOUBLE for NET!

And yes, CRWD has decelerated, but it’s been gradual and in absolute terms is still way above NET at 67% vs. 54%.

Based on historical trends, CRWD should hit about $430M in revenue this Q (though look at all the other SaaS stocks outperforming thus far so I wouldn’t be surprised to see a better number), and that would STILL be 67% YoY.

Sorry, I just don’t buy the NET > CRWD story yet, and I don’t think we can just assuming NET’s revenue growth will be more durable than CRWD over the long haul. Let’s see what NET’s revenue growth is when they hit $430M in revenues!

-Chris

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CRWD is P/S(TTM)=32 and NET is P/S(TTM)=57 as of today, so you’re paying almost DOUBLE for NET!

TTM is a common timeframe for calculating valuations (P/S, P/E, P/x…) and is often fine for a stable, low/no growth company. TTM can be extremely dangerous when used to value growth companies.

The value of a company is the net present value of future cash flows. There is a lot below the surface of this formula (WACC, Discount rate, growth rates, terminal value…) that makes it very complex, but the key word as it pertains to NET and CRWD is “future”.

NET’s future is one of accelerating growth. CRWD’s future is one of decelerating growth. NET is still stretching out the number of periods before it hits terminal value in the NPV formula. CRWD is getting closer to hitting it’s terminal value.

Bottom line: An absolute, backward looking valuation will always lead to making sell decisions too late when applied to hypergrowth companies. It isn’t where you’ve been, it’s where your going.

Lee

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“The value of a company is the net present value of future cash flows. There is a lot below the surface of this formula (WACC, Discount rate, growth rates, terminal value…) that makes it very complex, but the key word as it pertains to NET and CRWD is “future”.”

And so it stands to reason that:

1/ big funds use DPV models with very conservative assumptions (underestimating company performance and overestimating interest rates).

2/ deceleration is a big problem because it forces a downward revision of all fields and thus a lower “intrinsic value” today.

I think it is all futurology dressed to look like science but what really matters to us is that the company performance trend is king as it forces changes to DPV that are in turn presumably linked to algo programming.

Therefore, acceleration from any level is good, deceleration from any level is bad, holding up high is good.

This is my read of the “why” question.

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TTM is a common timeframe for calculating valuations (P/S, P/E, P/x…) and is often fine for a stable, low/no growth company. TTM can be extremely dangerous when used to value growth companies.

I don’t disagree, but even when you look at FWD P/S (+1) or (+2) years using current growth rates, by the end of 2 years you still have CRWD FWD P/S(+2 years)~=12.5, NET FWD P/S (+2 years)~=23.

How many years out do you think you can predict NET’s growth to outpace CRWD to the point where you will pay that premium?? I still think there’s math that is on CRWD’s side, but of course this is all in how you frame the conversation.

It’s clear most of the board doesn’t think CRWD is worthy of retaining and pretty much purely based on revenue growth deceleration, regardless of the oodles of positive metrics across the rest of their business relative to NET. I’m not saying I have the majority opinion here and don’t expect it to be very popular, but I think there’s plenty of merit to those who are holding the position still AND still within the confines of what this board considers to be hypergrowth Saul stocks.

And as always, every earnings report will move the needle in one direction or the other, so we’ll see what happens when CRWD reports in March.

-Chris

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Cfee2000, Runnerguy -

There have already been great responses from Bear, Buffjan, and rdgyy on Cloudflare’s premium, which is a topic that has been heavily discussed before[1]. I will offer my two cents because as I outlined on this post[2], I used to have difficulty understanding these price divergences as well.

As mentioned in my post, I used to view these discrepancies in valuation and buy what the market was irrationally discounting (in my view). Whereas now, I see valuation as a bet that market participants make on the company’s ability to outperform expectations. This is definitely not to say that “Cloudflare > Crowdstrike” in any way; or that Cloudflare will be growing at Crowdstrike’s rate in the future (which is highly unlikely). Rather, its a reflection of the belief that market participants think that Cloudflare has a higher probability to surpass today’s forecasts.

Did Cloudflare’s stock get out of hand a few months ago[3]? Sure! Did they somewhat become a ‘meme’ stock among Reddit[4]? Sure. But if you listen to their earnings calls, there is evidence again and again that a special company is being built. And every quarter, investors have an opportunity to evaluate whether the hype in the company is indeed becoming real through tangible evidence. And so far, the accelerating metrics are proving just that. To point just one of the many examples on yesterday’s call:

There was actually a start-up company called Zaraz, which was built entirely using Workers to optimize the marketing stack and build a much more secure, much more performant, and much more privacy-friendly sort of marketing…But what I think is important there is that the developers of the future are betting their whole companies on Workers. Zaraz is not the only example of this. We see more and more companies that are starting with Workers as their development platform, and the nature of development platforms is that they do create a flywheel where, as developers build tools, as they build out an ecosystem, that makes it so more and more developers get involved. And so, we’re excited about what’s going on with Workers.

Think about that. There are whole companies being built on top of Cloudflare’s network! That is very meaningful. Their high commitment to innovation expands the surface area for continued growth. Because keep in mind that a valuation, by nature, represents the atomic value of a company until perpetuity. Not just today’s revenue or next year’s revenue, or any way us humans like to measure it to make sense of it.

There many second-order consequences of this. For example, just like we are laser-focused on hypergrowth, there are many investors trying to find “the next Google” or “the next Amazon.” And we can’t blame them for betting on Cloudflare.

It may very well be that Crowdstrike proves investors wrong and starts accelerating in the coming quarters. And maybe the market will value the possibility if them becoming the “security cloud” at the scale of Salesforce for CRM as they tout in their investor presentations. But today, February 11 2022, the market is not willing to give it the benefit of doubt to merit that possibility. Maybe that will change soon…

-RMTZP
Visit https://discussion.fool.com/rules-of-the-board-revised-edition-3… to maximize your learning of the board before posting

[1] https://discussion.fool.com/cloudflare-here39s-what-we-were-miss…
[2] https://discussion.fool.com/an-evolving-perspective-on-valuation…
[3] https://cloudedjudgement.substack.com/p/clouded-judgement-11…
[4] https://markets.businessinsider.com/news/etf/this-etf-brings…

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And yes, CRWD has decelerated, but it’s been gradual

Hi cfee,
Perhaps you should reevaluate that.

Last quarter their total revenue growth went from 86% in the year ago quarter to 63% this quarter. That’s a 23 point fall. That’s “gradual”???

Last quarter Cloudflare’s revenue growth went from 50% in the year ago quarter to 54% this quarter. So which do you feel more comfortable holding. If you didn’t already own Crowdstrike would you run out and buy it?

Best,

Saul

PS Sure, you could say that their subscription revenue only fell 20 points instead of 23. Does that make you feel a lot better about them?

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But today, February 11 2022, the market is not willing to give it the benefit of doubt to merit that possibility. Maybe that will change soon…

As of yesterday’s close, Cloudflare was the #2 most highly valued SaaS company followed by Jamin Ball’s numbers as measured by the metric of EV/NTM at 44.5x (only Snowflake was higher).

There are no companies even close to it that are growing at 50%, with similar financial metrics.

I also remain an owner, but investors should know that the current valuation is higher than any of the stocks we hold when you consider all of the metrics. And that is because the market is GIVING the company the benefit of the doubt that they are building some bigger and longer lasting.

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"Last quarter their total revenue growth went from 86% in the year ago quarter to 63% this quarter. That’s a 23 point fall. That’s “gradual”???

This is so important. We often talk about companies accelerating or decelerating, but don’t quantify how much. Saul and others have learned to intuit it.

Crowdstrike’s rate of growth slowed by 27% because 63 is 27% less than 86. If that trend continues in the next year it will go from 63% to 46% (46 is 27% less than 63).

In physics they take these rate of change derivatives to further levels. The rate of change of acceleration (or deceleration) is “jerk”. https://en.wikipedia.org/wiki/Jerk_(physics).

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