Crowdstrike - Why I am feeling excited

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I thought Crowdstrike’s Q3’s earnings were very good and and actually made me think it could sustain hypergrowth for a very long time. But there’s lack of excitement on this board about its earnings. I wonder why.

First, Revenue growth accelerated QoQ to 12.6% vs. 11.5% prior. While revenue YoY decelerated to 63.5%, but that is expected given the very high base.

Second, Net new ARR QoQ growth accelerated to 12.9%. I thought this was a major improvement from the prior Q’s earnings when it stalled.

Third, Operating margins continued its upward march to 13.3% from 10.5% vs the prior Q and 8.1% in the prior year.

Management commentary on their earnings call and in the Wells Fargo Conference Call the day after was also very positive and highlighted the huge optionalities available to them, both near term and long term. Quotes:

“Second, we are seeing an inflection in new products with growing demand for our identity protection and Zero Trust, Humio and Cloud Security modules.”

“This quarter our win rates increased across the board and we saw a record number of wins against both legacy and next-gen vendors with SMB, midmarket and large enterprise customers.”

“We also landed a record number of wins and displacements over a recently public next-gen vendor, SentinelOne. To be clear, we define a displacement as removing an incumbent product and replacing it with Falcon.”

" you have spoken in the past that cloud workloads maybe even 10 times greater than the number of traditional endpoints that you could protect" and related to that, cloud security is a “largely greenfield opportunity”.

Lastly, the stock is trading at around 24x EV/NTM revenue. Compare that with Zscaler trading at above 40x when the growth rates are not all that different. I wonder why and would love to understand how people on this board are thinking about it.

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Looking at it from 12 months’ return perspective,

Crowdstrike’s current EV is at $46.3 Bil (stock price of $197)

12 months from now, its forward revenue at that point will be $2.65 billion, using street estimates (which is sandbagged and always lower than actual).

So that means if its stock price doesn’t move, the EV / forward revenue 12 months later will be 17.5x (46.3 / 2.65)

17.5x is the type of multiple that mature software companies like servicenow and adobe trades at (revenue growth of 20% thereabouts).

How is that even fair or even possible?

I just think the current stock price is an AMAZING entry point.

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CRWD used to guide revenue growth in the 70s but now it’s guiding in the 50s, so apparent slowdown here.

“the EV / forward revenue 12 months later will be 17.5x (46.3 / 2.65)”

“17.5x is the type of multiple that mature software companies like servicenow and adobe trades at (revenue growth of 20% thereabouts).”

forward EV/S 12 months later is actually two years out. As you noted CRWD’s 2-yr forward EV/S is roughly the same as NOW’s 1-yr forward EV/S, so market indeed is giving CRWD a premium. Analysts are expecting CRWD to be a 30% grower two years later as NOW is today.

Having said that I agree CRWD pulled off a solid quarter and is now trading at a rather reasonable multiple after being beaten down a lot compared to peers.

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“forward EV/S 12 months later is actually two years out. As you noted CRWD’s 2-yr forward EV/S is roughly the same as NOW’s 1-yr forward EV/S, so market indeed is giving CRWD a premium. Analysts are expecting CRWD to be a 30% grower two years later as NOW is today.”

I am using it to say that 12 MONTHS FROM NOW, Crowdstrike will still be a faster grower than Servicenow and Adobe TODAY. Hence the 17.5x forward multiple in 12 months is too low and should expand.

Servicenow grew both its revenue and operating income by 30% and for Adobe, it’s 15% a year.

Street estimates 33% revenue growth for Crowdstrike in CY2023 and in practice, that means at least 40% when it beats and raises. Further its operating income is expanding at twice the pace of revenue (given the operating margin profile is not yet mature)

So 12 months from now, you have CRWD growing its revenue at 1.5-2.5x the rate of servicenow and adobe, and its operating income growing 3-5x faster.

Yet they are trading at the same multiple (as the current stock price implies).

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The simple answer is opportunity cost: Crowdstrike has slowed down significantly and it’s already at a 45 billion dollar market cap. Monday.com, Zscaler, Ddog, and Zoominfo are all accelerating their growth. Which would you rather own? We all know that generally the most upside exists in companies that are at least maintaining their growth and ideally ones that are accelerating it. So, in the context of the best stocks discussed on this board, Crowdstrike looks like a much less desirable pick. Crowdstrike will likely continue to beat the market but if you’re shooting for 50% returns a year, it doesn’t appear to be one of the best options right now based on their numbers and outlook. I’d take accelerating growth over a low EV/S any day of the week.

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The simple answer is opportunity cost: Crowdstrike has slowed down significantly and it’s already at a 45 billion dollar market cap. Monday.com, Zscaler, Ddog, and Zoominfo are all accelerating their growth. Which would you rather own? We all know that generally the most upside exists in companies that are at least maintaining their growth and ideally ones that are accelerating it. So, in the context of the best stocks discussed on this board, Crowdstrike looks like a much less desirable pick. Crowdstrike will likely continue to beat the market but if you’re shooting for 50% returns a year, it doesn’t appear to be one of the best options right now based on their numbers and outlook. I’d take accelerating growth over a low EV/S any day of the week.

Crowdstrike and Zscaler have essentially the same market cap - CRWD at 44 billion and ZS at 43 billion. Also, Crowdstrike’s current most recent yoy revenue growth was still slightly higher than Zscaler’s.

Zscaler’s last qoq revenue growth was higher at 16.9% compared to 12.75% (which still translates to just over 61% growth yoy) for Crowdstrike. But is this truly predictive of future trends? And aren’t you somehow downgrading Crowdstrike for its past superior growth (compared to ZS)? Isn’t it quite possible that Zscaler’s annual revenue growth slips back to its prior rates below 50%?

I think they are both fundamentally performing extremely well. I’m not convinced that Zscaler is worth its much higher premium or likely to grow faster longer term (business or stock price wise) based on the above numbers.

Dave

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CRWD slowing down and ZS is accelerating. If you plot their growth on the chart, you’ll see. One quarter won’t tell the whole picture. There’s alternating uptick and downtick in growth. This quarter is an uptick. I think CRWD next qarter will be a downtick.

Unfortuntely, I can’t post pictures here. It appears CRWD has passed the peak of hyper growth and zs has not peaked. CRWD peaked early 2020 and has been steadily slowing down. Two more quarters, CRWD should slow down to around 10% QoQ growth or 46% annualized. ZS has not only maintained growth since 2020 but accelerated in the past 3 quarters.

I have no positions in either.

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I can’t predict the future but the key fact is Zscaler has been accelerating the last few quarters and Crowdstrike is slowing down. If that changes, then I’d have to reassess my holdings, just like I do every quarter. I prefer to give higher allocations to stocks that are accelerating, rather than slowing down. If the performance is strong along with the guide, then I give it a higher allocation. I’m following the numbers as a first rule, but also looking at the narrative along with it - expanding TAM, new product introductions, competitive landscape, etc.

I don’t care much about the past. The market is forward looking. The stock has to earn its place in my portfolio every quarter and also justify its expectations to Mr. Market. That is my focus.

After the CrowdStrike earnings report I reduced my allocation from 8% to 5%. After the Zscaler report I increased my allocation from 10% to 12%. Right or wrong? Who knows? But that was my thought process.

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"The simple answer is opportunity cost: Crowdstrike has slowed down significantly and it’s already at a 45 billion dollar market cap. Monday.com, Zscaler, Ddog, and Zoominfo are all accelerating their growth. "

That summarize the approach employed here. Get in the fast growing ones and exit them as soon as it starts to slowdown which they always do after few quarters of hot growth. You hope there is no hiccup or bad surprise along the way in which case the stock just craters very quickly. Get into the rocket just before it takes off when it is high enough jettison it and jump into another one. Do that and repeat if you can find the next rocket.

There are real rockets that continues to give good thrust over decades but with this method you would not know that. But riding many little rockets in a shorter time span is what we are talking about here. Going in and out and back in if they appear to re-accelerate.

tj

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