CRWD Q2FY22: GauchoRico's Take

CRWD (15.8% allocation; Q2FY22 31Aug earnings date)

CRWD stock has moved around a fair amount going into earnings. It first dropped and then rallied after the PANW results. The cyber security sector has received a lot of attention recently with several high-profile ransomware attacks earlier in 2021. In addition, Russian and Chinese hackers successfully conducted some massive breaches. The full attention of the U.S. government is now on better protecting both public and private computer systems. It seems that the tailwinds for cyber security vendors could not be stronger. With this backdrop, I’ve been expecting a strong acceleration in results for best-in-class cloud cyber security company CRWD. Well, I’ve been expecting a strong acceleration in growth for CRWD for a least three quarters now. It didn’t materialize in Q4 FY2021. Not in Q1 FY2022. And now in Q2 FY2022, it didn’t come either. So I ask myself, as I have been doing after each of the past several quarters, whether a reacceleration is still coming or whether the recent quarters’ results are as strong as they’re going to be going forward. Was a steeper deceleration in the cards without the pandemic and cyber security industry tailwinds? After the latest results, let’s reevaluate.

*** Room to grow: If one listens to management and believes what they’ve been saying, then CRWD still has a lot of room to run. Specifically, they’ve been pointing out that with about 13,000 customers CRWD still has the vast majority of the market to capture; some of the legacy cyber security companies have well over 100,000 customers. Furthermore, when looking at CRWD’s investor presentation (updated in August 2021:… ), we can see that CRWD claims that companies are vastly underspending on IT security (see slides 22-23) and should in aggregate spend 5-10x of their current spend. According to third party market research and the Company’s analysis, CRWD’s TAM (total addressable market), including both market growth and new products, is set to increase by about 200% in the next four years as shown in slide 24 of the investor presentation referenced above.

CRWD appears to have a lot of room to grow.

*** Customers continue to expand their spend with CRWD: CRWD’s dollar-based net retention has exceeded 120% in each quarter for the past 14 consecutive quarters. CRWD continues to add new modules and customers are eating up what CRWD is selling. CRWD reports the percentage of their customers that have purchased 4+, 5+, and 6+ modules, and these metrics are getting better and better each quarter. All three increased again. Looking over the past five quarters (see table below), we can see that customers are increasingly adopting more modules all while CRWD continues to grow its customer base at a blistering rate (in excess of 80% y/y). This is an incredible feat especially considering that CRWD is now quite large: achieved $1B+ ARR three quarters ago. In addition, CRWD continues to grow the number of modules so perhaps we can soon expect the Company to report customers using 7+ modules, then 8+, and so on. These metrics also point to CRWD’s ability to develop products that are highly valued by customers.

	                Q2 2021	Q3 2021	Q4 2021	Q1 2022	Q2 2022
Sequential Cust Growth	15.5%	16.4%	17.6%	15.4%	14.5%
% Using 4+ Modules	57%	61%	63%	64%	66%
% Using 5+ Modules	39%	44%	47%	50%	53%
% Using 6+ Modules	N/A	22%	24%	27%	29%

*** Revenue and ARR growth stagnation: CRWD’s subscription revenue grew 71% y/y continuing a deceleration that began four quarters ago. Likewise, ARR y/y growth continued to decelerate dipping to 70% growth from 74% in the prior quarter and 87% a year ago. Admittedly, these metrics were just a little disappointing to me when considering that the cyber security industry supposedly has the strongest tailwinds and sentiment ever. I and other investors were certainly hoping for a re-acceleration of revenue growth and ARR growth. But complaining about 70%+ growth seems silly as CRWD is still among the best of the best growth companies out there. So, as an investor, I’m satisfied and am content to wait three months to see what Q3 brings.

*** Management enthusiasm: In comparison to recent quarters, CRWD’s management sounded relatively subdued on the earnings call. My perception of the change in tone could mean nothing at all or perhaps it had something to do with the relative success of CRWD’s competitors, notably PANW which had a very enthusiastic earnings call. In any case, this is just speculation and doesn’t factor at all into my allocation decision.

In summary, CRWD appears to be on track and my confidence in the Company remains high. However, UPST has now surpassed CRWD as the company with the best risk-reward profile (IMO). DDOG has also caught up to CRWD, and I’d rank DDOG to be about equal to CRWD on the risk-reward scale. I did sell about 12% of my 2023 call options so my allocation is now 15.8%, but the position behaves like a 37% allocation position.