Encouraging CRWD trend

Investment Analysis Clubs Saul’s Investing Discussions
#4

Bear, other interesting CRWD trends:


**Free Cash Flow Margin:**

**Fiscal 2017   -123%**
**Fiscal 2018    -80%**
**Fiscal 2019    -26%**

**Gross Profit Percent of Revenue**

**Fiscal 2017    36%**
**Fiscal 2018    54%**
**Fiscal 2019    65%**
**Last Q         71%**

**Dollar Based Net Retention Rate**

**Fiscal 2017    103%**
**Fiscal 2018    119%**
**Fiscal 2019    147%**

When I see people obsessing over “value” metrics like EV/S for these companies (which essentially compare them to legacy S&P-type companies) and deciding they are over-valued so they can’t buy them, I just scratch my head. They are just missing what’s going on in the world. (But that’s just my opinion).

Saul

35 Likes
#5

Free Cash Flow Margin:


Fiscal 2017   -123%
Fiscal 2018    -80%
Fiscal 2019    -26%

Gross Profit Percent of Revenue

Fiscal 2017    36%
Fiscal 2018    54%
Fiscal 2019    65%
Last Q         71%

Dollar Based Net Retention Rate

Fiscal 2017    103%
Fiscal 2018    119%
Fiscal 2019    147%
*When I see people obsessing over "value" metrics like EV/S for these companies (which essentially compare them to legacy S&P-type companies) and deciding they are over-valued so they can't buy them, I just scratch my head. They are just missing what's going on in the world. (But that's just my opinion).*

Saul,

Those numbers are all incredible. You’re right that CRWD which has these numbers (and near-100% YoY growth) is in a different league than even another exciting company with 50% or 60% growth.

But if you’re saying you can buy a business with these numbers at ANY price, I still disagree. What about a market cap of $200 billion? I doubt you would pay that. Sure, that’s an absurd example, but if you’re saying you’d buy it at any price, but not that price…what are you saying?

Bear

16 Likes
#6

I’m not familiar with CRWD, but in this case highlighting EPS doesn’t seem like a great measurement to me. The diluted share count is up nearly 3x over the past year. Net losses have actually grown over that period, but the enormous growth in diluted share count means those losses are spread over more shares… thus, a negative EPS number that seems to be improving.

That trend makes the EPS appear to be improving, but it also represents a much higher hurdle for the company to climb on a per-share basis if/when it becomes profitable and EPS turns positive.

Just my two cents. I’d keep the share count in mind before crediting the company on improving EPS numbers. I enjoy the analysis and thinking on this board and thought I’d add this to the mix. Carry on. :slight_smile:

Foolishly,
David K

55 Likes
#7

Saul, Those numbers are all incredible. You’re right that CRWD which has these numbers (and near-100% YoY growth) is in a different league than even another exciting company with 50% or 60% growth. But if you’re saying you can buy a business with these numbers at ANY price, I still disagree. What about a market cap of $200 billion? I doubt you would pay that.

Bear, you are just setting up a straw man that has nothing to do with reality to then shoot it down. Crowd’s EV is under $12 million, not $200 million!!! The market would never give it a valuation of $200 million at current numbers so that argument is completely irrelevant. Two hundred million has nothing to do with twelve million.

Sure, that’s an absurd example

I agree with you.

…but if you’re saying you’d buy it at any price, but not that price…what are you saying? Bear

I never said I’d buy it at any price. I’m saying that I’d buy it at the price the market is giving it, and that the market isn’t as stupid as you are implying it is. I’m saying that EV/S has a different meaning when margins are high and rising, when revenue growth is huge, and when revenue is on subscription and recurring, instead of “Buy our product again when you next feel like it” which may or may not occur. It’s a completely different proposition. Think about that! instead of getting caught up comparing EV/S over and over again).

Best,

Saul

12 Likes
#8

The diluted share count is up nearly 3x over the past year.

Hi David, and welcome to the board. CrowdStrike just IPO’ed a few months ago so that’s a very flawed statistic.

Saul

12 Likes
#9

I never said I’d buy it at any price. I’m saying that I’d buy it at the price the market is giving it.

I just want to point out that if you won’t buy it at any price, you’re agreeing that valuation matters.

Sure, the market isn’t pricing it at $200 billion which we would probably all agree is absurd. But it is pricing it at a price that some people think is absurd. If you say that they are wrong, you are making a statement about valuation.

Bear

10 Likes
#10

Saul: I never said I’d buy it at any price. I’m saying that I’d buy it at the price the market is giving it.

Bear: I just want to point out that if you won’t buy it at any price, you’re agreeing that valuation matters… The market is pricing it at a price that some people think is absurd. If you say that they are wrong, you are making a statement about valuation.

Saul: Nope, I don’t even look at those valuation metrics. I’m not making a statement about valuation. I’m saying that I’ll buy it at the price the market has given it, with the expectation (and confidence) that a company with the metrics I discussed above (not even counting the almost 100% revenue growth), is sure to be worth more in the future (that the market will give it a higher price in the future)…

Same with Datadog. Everyone who looks at it says “Wow! What an amazing, remarkable, fantastic and terrific company!” but half of them won’t buy it because they think it’s “overpriced”. I think that is very, very, very short term thinking. The question isn’t whether it is currently overpriced, but whether we can be confident that it will be worth more in the future, and if ever there was a company that I have felt sure will be worth more in the future, Datadog is it.

You and I just have a different way of looking at this. You look at EV/S to make a decision, I take a wholistic look at revenue growth, ease of on boarding, movement toward profit, gross margins, operating and free cash flow, recurring revenue, effectiveness of land and expand, dollar-based net retention rate, the whole thing, and I’m willing to admit that part of it is subjective and intuitive, and also that I make mistakes sometimes, but I just don’t worry about EV/S. I don’t even look it up unless I’m challenged on it. I never bother to calculate it. I just simply don’t consider it as part of my decision making.

I’m not meaning to imply that you don’t look at everything else. What I’m saying is that you allow EV/S to dominate your decision in the sense of letting it overrule everything else. I hope what I’m saying is clear and unoffensive.

Best,

Saul

37 Likes
#11

Hi David, and welcome to the board.

Thanks, Saul! Long-time reader of the board and the great analysis that goes on here.

CrowdStrike just IPO’ed a few months ago so that’s a very flawed statistic.

That’s definitely fair. But if diluted share count is a very flawed statistic, by that logic so is EPS (since diluted share count is the denominator). EPS is almost meaningless in this case, I would argue, until there’s a more consistent year-over-year comparison.

Foolishly,
David K

16 Likes
#12

EPS is almost meaningless in this case, I would argue, until there’s a more consistent year-over-year comparison.

Hi again David,

Yes, either Adjusted Net Income or Adjusted Net Profit Margin would make more sense for CRWD in this case.

Adj net loss was $23.1 million, improved from $30.4 million the year before.

That gives a net profit margin of minus 21.4% (23.1 divided by 108.1), improved from minus 54.6% (30.4 divided by 55.7).

That’s a fairly awesome set of numbers too.

Saul

5 Likes
#13

I’m not meaning to imply that you don’t look at everything else. What I’m saying is that you allow EV/S to dominate your decision in the sense of letting it overrule everything else. I hope what I’m saying is clear and unoffensive.

It’s not at all offensive. And I think it’s clear. I think what you’re saying is that you trust the market to value stocks. That explains why you feel you can ignore valuation – you trust that the market would never do something so crazy as value CRWD at 200 billion dollars.

But it did recently value Crowdstrike at 20 billion and now it’s 11 billion (a 45% drop). Zscaler was at 12 billion and now it’s at 6 billion (a 50% drop). Zoom was at 30 billion and now it’s at 20 billion (a 33% drop).

Alteryx is down from 10 billion to 7.4 billion (a 26% drop) and MongoDB is down from 10 billion to 8 billion (a 20% drop) and Elastic is down from 7.5 billion to 5.7 billion (a 24% drop).

Almost all the companies which had higher valuations a few months ago have fallen further than those whose valuations weren’t as dear. That’s why I can’t understand why you don’t think valuation is a useful metric.

Bear

19 Likes
#14

But Bear, even with those big drops you point out, in all my stocks, I’m currently up about 35% year to date, which I’d except gladly year after year, with never a word of complaint.

Saul

10 Likes
#15

Regarding CRWD’s gross margin, as you can see it has a come up from a very low 36% in 2017. This is how CRWD gets its disruptive power. Any existing security company that wants to go to cloud native EPP is going to have to take a big profit hit. According to Kurtz they are not willing to do that. This gives CRWD years of advantage over the incumbents. This I think is important because you have to have some truly disruptive power the incumbents are not able to duplicate. Robinhood is a startup focused on discount stock trades competing with others who built themselves from the ground up to do the same. Their only advantage was $0 commissions. Something incumbents were able to duplicate. On top of this, they have a superior platform compared to Robinhood.

1 Like
#16

Speaking of CRWD trends, I looked at Crowdstrike’s last two 10-Qs (the only ones they have) I get the following numbers.

Share count
July 2018 - 44,105,000
July 2019 - 130,091,000
Increase 294%

Revenue
July 2018 - $55,701,000
July 2019 - $108,108,000
Increase 95%

Cash Flow
July 2018 - ($66,494,000)
July 2019 - ($77,866,000)
Increase 17%

Readers can pretty much draw their own conclusions here.

The share count has increased 3X year over year.

Revenue is up 95% YOY

The negative cash flow was 119% of revenue, but only 72% of revenue this year.

Jeb
No position
Explorer Supernaut
You can see all my holdings here: https://discussion.fool.com/profile/TMFJebbo/info.aspx

5 Likes
#17

I think what you’re saying is that you trust the market to value stocks.

This is where I fall into. All the questions of “would you pay 30x or 40x or 100x” with regard to valuation don’t apply.

Would anyone pay double the going rate for a stock? Of course not. But that’s not how stocks work. There’s a built in check. In the knowledge base example Saul points out that when stocks were going up double digit percentage day after day on no news during the internet bubble he sold those stocks.

If a stock price is moving reasonably, just go for quality. The market will price a company where it wants to price it. You can’t control that. If it decides a company growing 50% is worth 20x revenue is suddenly worth 10x, what can you do? There’s no guarantee that whatever other company you choose will maintain its valuation. If that happens, a company growing 30% might only be worth 3x. And I fully believe comparing different companies’ P/S ratios is meaningless for similar reasons, since there are so many more factors that go into the price that any comparisons become pointless.

If you’re a venture capitalist you have to concern yourself with valuation because the market is small. In the public market you just pay the going rate. Except for very thinly traded companies or just after the IPO before a stock can equilibrate, you don’t have to pay anything more than what thousands or millions of others are willing pay. If you’re a growth investor, just decide whether you want to own a piece of the company based on its prospects for growth.

17 Likes
#18

The share count has increased 3X year over year.

Jeb,

That is incorrect.

Please refer to this post: https://discussion.fool.com/denny-you-were-confused-because-12x-…

Bear

7 Likes
#19

The share count has increased 3X year over year.

Jeb, I know that you know better than that. CrowdStrike just IPOed. The kind of shares they had a year before the IPO have little relationship to the kind they have now. It’s the same for almost every company that has an IPO.

It’s my experience that when you get a result that seems silly (ie three times as many shares), it means you misunderstood something and have to look deeper, not that you should believe it. If you do it often makes YOU feel silly when it is explained to you (it’s happened to me). You might want to read Bear’s explanation.

Best,

Saul

4 Likes
#20

Also if you are looking at “weighted average” shares outstanding you will see it going up every quarter, that’s because it’s the average number of shares over the past year. Since they started the year with little shares outstanding, and currently have 225 million shares outstanding, each quarter their weighted average shares outstanding will increase. It’s not because they keep issuing a bunch of shares every quarter, it’s how that number is calculated. It’s best to look at total number shares outstanding to get the true number of shares. This can be found on the shareholder equity section of the balance sheet.

Next quarter they are forecasting something like 147 million weighted shares outstanding. This is misleading for calculating enterprise value/market cap, and should be ignored.

4 Likes
#21

I have not subscribed long enough to Bert’s service or read enough of his posts yet to completely understand his methodology, but one common theme that I think I may have picked up on is his ability to evaluate companies taking into consideration valuation (ie. EV/S) while looking at valuation through the lens of growth. (Not strictly, but one of many hard and soft metrics that he uses). It seems to me that he often expresses an opinion on EV/S as it pertains to a “growth cohort”, such as 20%, 30%, 40% growers. I think he may be implying that high growth companies have to be evaluated differently; similar to points I believe some others have made above in this thread.

I am certainly guilty of investing in many companies discussed on this board that would never make the cut for my portfolio if I subjected them to a “valuation filter”. I believe that winners win. I won’t be right all the time, but it has worked for me. YTD I am up 37.4%. I suffered dearly during the heat of the rotation, but at the end of the day, I believe the market is efficient and recognizes quality and duly rewards smart growth.

7 Likes
#22

Hoping to add value to this aboard, albeit a little, I earlier posted this:

Share count
July 2018 - 44,105,000
July 2019 - 130,091,000
Increase 294%

Revenue
July 2018 - $55,701,000
July 2019 - $108,108,000
Increase 95%

Cash Flow
July 2018 - ($66,494,000)
July 2019 - ($77,866,000)
Increase 17%

After some kind guidance off board I realize BOY I REALLY BLEW IT!!

From their last press release on the subject CrowdStrike said:

Revenue: Total revenue was $108.1 million, a 94% increase, compared to $55.7 million in the second quarter of fiscal 2019.

Cash Flow: Net cash used in operations was $6.2 million, compared to a use of $28.7 million in the second quarter of fiscal 2019.
Free cash flow was negative $29.2 million, compared to negative $35.7 million in the second quarter of fiscal 2019.

OK, at least I got the revenue right. Share counts, particularly right after an IPO, can be tricky. I encourage others to follow the links posted in the thread for clarification. And though I got my Cash Flow information from the top line on the 10-Q there were adjustments which were not included. I apologize for the inaccuracies.

The bottom line is this: I’m still learning, and this is a great place to do it.

Best,

Jeb

33 Likes
#23

To clarify further why the FCF is so much more negative than the OpCF, from pg 58 of the 10Q


**Revenue                                                                 108.1**

__**Cash used in Ops (Op Cash Flow)**   		   		          6.2		neg 6%__
 **Less Purchases of Property and Equipment			         21.6**
 **Less Capitalized internal use software				  1.3**

__**Free Cash Flow (negative)**				                 29.2           neg 27%__

It wasn’t anything malign, just mostly purchases of property and equipment.

Saul

5 Likes