On Crowdstrike

Investment Analysis Clubs Saul’s Investing Discussions
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As you know, at the end of 2021, a week and a half ago, Crowdstrike was down to my smallest position at 4.0% of my portfolio.

Over this last weekend, I had occasion to ask myself “If I wasn’t in Crowdstrike and someone came along and proposed this company to me out of the blue, would I start a position in it?”

Let’s see, revenue growth of 63%, down from 87% yoy, and down from 70% sequentially, falling off a cliff, in spite of all the tailwinds in the world, with even its advocates predicting mid-50%s for the coming year. And this while other security companies are accelerating, like Zscaler, SentinelOne, Palo Alto, and even Cloudflare (a little). Would I pick this as one of my top conviction nine or so companies? I mean, we have a competitor, SentinelOne growing at 127%! So my answer would be “No way!”

So I had to ask myself, "So why am I staying in it, even as my smallest position?" and decided it was sort of sentimentality, combined with hope for a turnaround, neither of which is a good reason for holding on.

So I sold out yesterday and put the money in ZoomInfo, Zscaler, Snowflake, SentinelOne, and Amplitude (they are listed in on particular order), and just a touch in Monday as it was already a 17% position.

Best,

Saul

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-Thanks for your thoughts Saul.

-I was thinking along similar lines. I’ve already trimmed CRWD to 1%, I was just waiting to see if they can re-accelerate in the next quarter due to the UI Path agreement and some of the other partnerships they announced. However, every 1% counts and my other positions do look to have more upside and it pays to move to higher conviction stocks, especially during a rotation, so maybe I should follow suit and sell out completely. I will have to mull it over. Q4 is also usually a weaker one for Crowdstrike, so that may be another reason to sell. As I like to remind myself. “I can always get back in if the story changes.”

-I believe these are the kind of small moves, based on the numbers (not sentimentality), that can really make a difference over time in a concentrated Portfolio.

-I also sold Bill.com last week as I was trying to follow my own advice/learnings and not own a company with a lot of acquisitions that adds risk and makes the story more murky and hard to follow. This risk is on top of the non-SaaS, variable revenue piece to Bill.com. Also, there is a chance that SMB’s may be affected due to the resurgence in the pandemic.

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Y’know, there’s a better word than sentimentality. It’s nostalgia, nostalgia for the “good old days” when Crowd was growing in the 90%s and dominated the field, and it’s hard to admit, even to yourself, that those days are gone for good.

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I need to be clear: I don’t know what will actually happen with Crowdstrike. That wonderful reaccelerating of revenue growth that we were hoping for may happen, or they may make enough money even without the revenue acceleration to make the price rise attractively.

If so I’d be happy for the guys on the board who are still in it, but it won’t bother me in any way as I made the decision that I thought was correct at the time, and I believe that the companies that I put the money in should do very well. And if they don’t, then I made a mistake. I’ve made many of them over the years.

Saul

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Hello,

Thanks Saul for bringing this up.

I own both Crwd and S.

For Crowdstrike, the year-on-year number looks like it’s decelerating partly because the base for the whole of 2020 was very high (pandemic work from home results in companies scrambling to purchase endpoint for employees).

I am seeing that the QoQ numbers have stabilized since July 2021 at 11-12% QoQ (or around a 55% annualized rate).

July 2021 QoQ = 11.5%. Oct 2021 QoQ = 12.5%. I believe they will deliver another 12% QoQ for Jan 2022 (based on guidance).

If this continues, the YoY number should start stabilizing in either the Jan 2022 Q or the Apr 2022 Q, as it cycles past the tough 2020 comps.

That should lead to a dramatic multiple expansion as the market realizes that a 55% annualized grower is only trading at 21x NTM EV/Revenue!

This is what I believe will happen but if it doesn’t, then I will sell it.

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Saul,

Yesterday when you pointed to slowing growth, I decided to sell out. Did so this morning, at market. Bought Sentinel One as I had no position.

I did this without regard to profit or loss, without regard to bid/ask, without regard to charts or momentum.

I mention this because all these have been considerations in the past and while entry points matter, learning to invest versus speculate has taught me do these things.

I feel, might be wrong, that this is evidence of becoming an investor simular to Saul.

Cheers
Qazulight

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My view in Cybersecurity has been, and remains the same, the sector is growing, but innovation and adaptation will win the day.

What is fundamentally changing in cybersecurity is the movement from known locations (offices) that deploy (locally) software and use firewalls to protect from the outsiders marching in.

Cybersecurity is now about knowing who is trying to connect to the network and ensuring they have the right access. It starts with Zero Trust.

In the cloud environment, and the work from home environment, this is much more complicated than before. You have many users in many places from many networks.

It’s why cloud native security designs have won the day. They’ve designed with the future state in mind.

For Crowdstrike, you have a leader with a huge moat in the amount of data it collects.

I think it faces similar challenges to many WFH stocks - you don’t know how much future earnings were pulled forward last year due to pandemic buying.

But work from home is here to stay…and cybersecurity importance is a huge tailwinds field.

So, I’m not technical enough to know the difference between CRWD endpoint vs S endpoint vs NET endpoint vs ESTC endpoint. And frankly, I don’t care.

I think of cybersecurity as a basket. My rule is that it has to be cloud based. Then from there, it needs to be a leader in its sector. ZS, OKTA, CRWD. What I appreciate about this board and others and being able to identify a SentinelOne and say “hey, I might want to take part of my CRWD and split into S, in the event they out innovate CRWD”

All 4 of those stocks make up 35% of my portfolio. I’m a longer hold than Saul and others in here. To my own detriment and to my own benefit at times.

Everyone should act in their best interest.

I will say this, years ago it was mentioned that if a company can get to $1B in annual revenue and still be growing at 50% growth rate, it had a chance to be one of those game changing stocks (SHOP, AMZN, etc).

CRWD has $1.3B in revenues looking backwards at a 67% growth rate. That’s on top of the pandemic spending spree.

Folks, it ain’t shabby.

The question becomes, what would you bet one… CRWD moving from a $45B company to a $200B company or S moving from a $12B to a $50B company.

Im cheating, I’m still betting on both horses.

Just a Fool

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Thanks for the post. I had trimmed Crowdstrike to 5% from closer to 20% not too long ago. Why was holding on to 5%? I won’t call it sentimental, but it was mostly hopeful. They’ve been building various partnerships which hold promise for a return to higher growth in the future. But I really have no sense of when that future will arrive or if it will arrive at all. Your post has helped me clarify my thinking. We invest in results, not promises. I will close this position tomorrow.

I can always buy back in if the situation warrants. I’m not concerned about missing the potential runup. I can’t think of a single company I’ve ever bought at the most opportune time. I’ve always been somewhat late to the party, but nevertheless, my portfolio performance has been very good.

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Hey there !

Since we’re telling how we handle such companies as CRWD, I’ll tell how I handle the problem of “sell now and buy back later.”
If you sell out, you will not buy back in when you should because you won’t be watching that close. You tend to pay attention to what you currently own … not what you sold.
So what I do when I want to “sell now and buy back latter” is:
Sell all but only one (1) share. That way it is still in front of you … you will see it start back up. Then you can RESEARCH the company and make your decision to buy back or not.

It may not work for you but it does work for me.

Rich (haywool) going to 1 CRWD share today

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Your basket approach has some merit. Some have pointed out customer wins from a competitor, or large name wins. From the Q4 CRWD transcripts in March:

-New large logos include Pfizer and Proctor and Gamble
-Win w/ a large technology company to displace a legacy software (sentinel one)
-secured a foundational customer, a large defense contractor

Every company is going to paint themselves in the possible light, so while comparing companies in the same field, I would think customer mentions could perhaps contribute to confirmation bias depending how one feels about the companies mentioned.

If narrowing down to select one company, then revenue growth appears to be the single best metric since it carries no bias that I am aware of.

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I don’t really understand this thread. Here we have a company with solid track record and delivery, with 1B turn over and a massive market in front, beating the market predictions quarter over quarter and praised by the IT cybersecurity specialists on every technical forum. Yet, this post uses a simplistic YoY growth number to compare it and dismiss it over other smaller companies, which are in a different stage of their life, just because some of them have grown revenue faster in the last year. I am genuinely shocked.

For example, Zscaler (which I own too) has grown slower compared to CRWD history. S1 is still a small start up with negative cash flow and plenty of complains in the forums about the company’s technical solution and customer service.

This may be a smart move, there may be other analysis not told here. However, for people to start selling a company like CRWD based on a simplistic analysis of growth for few quarters, no matter how clever investor Saul you are (which I assume you are), feels to me FOMO/Hype based investment.

And celebrating a success following a one day raise or loss… this is far from the philosophy we should be chasing.

What is next, Shiba Inu, dodge?

Come on people, we are better than this!

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He publishes a monthly update with a lot of commentary. His last one was here:

https://discussion.fool.com/my-portfolio-at-the-end-of-2021-3501…

Also, I don’t think you understand their point regarding CRWD. They are concerned about decelerating growth quarter over quarter. I haven’t sold anything, but I understand why they did. I want to see another quarter or two before I head for the exit. They’re still firing on all cylinders, just not as “hot” as a few quarters ago.

1poorguy (long CRWD)

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Come on people, we are better than this!

This response isn’t so much for peterizp, as for those new to this board that perhaps might look at Crowdstrike on the surface and have the same feelings.

As a company there is certainly nothing wrong with them, and heck, they are in the top 15 of companies we discuss here. The core thesis of this board, however, is concentrated hypergrowth for investment purposes. In that regard, given Crowdstrike’s declining revenue growth and also declining customer growth they simply don’t belong in the same conversation as the top companies discussed here.

We’ve seen the same with companies like DocuSign, OKTA, Zoom, Alteryx, Lightspeed, ROKU, Trade Desk, Twilio, Square, etc. When the growth slows it’s time to move on.

Brandon

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And I’m sorry for this short post yet again, but there is one more important point I want to make. In a big downturn, where all our stocks are being sold indiscriminately, its always better to be holding companies with improving metrics, not the other way around.

Brandon

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“I don’t really understand this thread.”

I would suggest reading before posting:

Saul’s Knowledgebase
Part 2
Part 3
How I Pick a Company to Invest In

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My bad, I did not realised that this board was based on hypergrowth and improving growth metrics. I thought it was following the “chose a good growth company” style of TMF.

In that case, Zscaler is not in hypergrowth mode anymore, just healthy 40-60% growth, similar to CRWD. ??

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“ We’ve seen the same with companies like DocuSign, OKTA, Zoom, Alteryx, Lightspeed, ROKU, Trade Desk, Twilio, Square, etc. When the growth slows it’s time to move on.”

This is a great approach to momentum investing. Clearly there is more to the Saul method than just buying and holding great companies. Being ruthless about abandoning them the minute the growth wave breaks is key to capturing investment profits.

I wonder if there is a way to back test this momo investment style? I’d be interested in seeing if stocks that are growing revenues rapidly always go up until that growth rate decelerates.

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peterizp,

In that case, Zscaler is not in hypergrowth mode anymore, just healthy 40-60% growth, similar to CRWD. ??

Thanks for the post – you made me go back and revisit ZScaler instead of blindly following. In this case, I think Saul’s still right, but it’s always good to check for yourself. (And to be fair, I didn’t really look that closely at ZScaler, but some is better than none.)

While there is some focus on hypergrowth on this board, I feel like there’s more focus on accelerating growth. And SaaS companies with high margins and high NRR. I believe ZScaler meets those criteria.

To quote from Saul’s latest write-up on ZScaler… (I didn’t not check the numbers, but I assume that most are correct):

Zscaler…had excellent October quarter results, announced a month ago.

• Revenue: $230.5 million, up 62%, accelerating from 52% last year, and 57% last quarter
• Revenue growth sequentially was up 17%, accelerating from up 12% last quarter and up 13% a year ago.
• Billings were up 71% from $145 million to $248 million yoy. A year ago they were only up 64%.
• Op Cash flow was $93 million, up from $54 million last year
• Free cash flow was $83 million, up from $42 million last year !!!

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