Thinking about Crowdstrike again

[wsm007]

I sold Crowdstrike last month and I’m already having doubts. Call it seller’s remorse. This is the company that I probably know the best, so I thought to just think critically about my decision.

This led me to look a bit deeper into the composition of their revenue, to see if there is anything there. Their geographical split of revenue for the last 3 quarters looks like this:

	Q1	%	qoq g%	Q2	%	qoq g%	Q3	%
								
US	219.8	72.6%	**11.3%**	244.7	72.4%	**13.1%**	276.7	72.8%
EMEA	41.6	13.7%	**12.0%**	46.6	13.8%	**8.8%**	50.7	13.3%
APAC	29.0	9.6%	13.8%	33.0	9.8%	13.0%	37.3	9.8%
Other	12.3	4.1%	9.8%	13.5	4.0%	13.3%	15.3	4.0%
								
Total	302.7		11.6%	337.8		12.5%	380.0	

What stood out for me is that their US growth has, in fact ticked up in Q3, going from 11.3% qoq to 13.1% qoq, whereas they seem to have an issue in their second-biggest geographical area, contributing 14% of revenue - EMEA, where growth decelerated a lot, from 12% qoq in Q2 to 8.8% in Q3. APAC seems to be holding at around 13% qoq and the rest of the world has also ticked up.

So, looking at how marginal it was for me to sell, and the progress that CRWD has been making recently with two important alliances - XDR and with UiPath - did I pull the trigger too early hear?

Also, after having gone nowhere for a year, the stock is down even more recently - now down 60% from its 52-week high, and trading at a similar multiple to Zoominfo, which many, myself included, seem to think is undervalued.

Is it possible that they will manage to course-correct in Europe and that we could be in for a nice positive surprise, with Kurtz coming out with all guns blazing in Q4?

Crowdstrike is still the next-gen endpoint category leader and SentinelOne is not likely to displace them anytime soon. And their alliances need time to bear fruit, specifically Zscaler, XDR and UiPath.

Anyhow, I would really love to hear others’ views on this one as I’m wishing I had spare cash lying around to pick up some of these excellent companies that seem to me to be on sale at the moment.

-WSM

[cfee2000]

I think you’re highlighting some reasons why I still hold a 14.5% position in CRWD and no position in S.

Too add to your list, CRWD also has 13% QoQ growth in RPO’s, had $123M in FCF w/ 32.5% FCF Margin, is still growing subscription customers at scale at 12% QoQ and 75% YoY. Also, they had a strong guide that puts them in a spot where they are very likely to maintain 13% QoQ next quarter, which let’s not forget is still 63% annualized if they maintain that.

And remember this? https://discussion.fool.com/crwd-vs-sentinelone-34847437.aspx

I don’t think enough has changed to warrant dumping CRWD for S after 2 reports in which, yes S has done well, but so has CRWD. I just can’t get behind the idea that there’s as meaningful a deceleration in growth with CRWD that is worth of such a shift so quickly as others on this board have made. Even with the VERY mild deceleration on some fronts, they are still maintaining superior growth to many of the companies we’re invested in.

I think the earnings transcript is worth a read - https://www.fool.com/earnings/call-transcripts/2021/12/02/cr…. Search the comments for “competitor” and you’ll see some key statements on their competition, and no its not all just bluster from Kurtz but real meaningful results vs. the competition.

Candidly, I was wrong about holding ZM and TDOC too long in the past, so I could be wrong again here, but even looking at those mistakes with as much of an objective lens as I can, I don’t see the same pattern with CRWD.

Just my 2 cents.

-Chris

[XMFMonkey]

This is the company that I probably know the best

Let’s not get too cheetah-ish and zip past this deeply important morsel from WSM. Much of successful long-term investing with high returns has to do with trusting the people running these businesses we invest in because they are the businesses.

And trust does not happen overnight. So most of us on this board have developed a several year long relationship with Crowdstrike already, and we know that Kurtz and co. are serious gunslingers, on the shareholders side, who hustle and perform quarter after quarter after quarter after quarter after quarter.

Let’s assume that S can outperform CRWD by a few percentage points financially. Do their lesser-known-quantities–at least to us-- make those few percentage points worth the leap in faith a new investment in them requires, one that we don’t need to make with CRWD?

At some point, Monkey likes sleeping in his hammock with less worry, fewer wrinkles, and without much disruption to his piña colada drinking ways. Sacrificing small financial gains for huge gains in trust and steady-as-she-goes-leadership is not a small consideration.

And that’s assuming S performs better financially, which we all know about how assuming makes a donkey out of you and me.

All this handsome ball of fur is saying is don’t discount a long-term relationship to gain a possibly one-night-stand-ish incremental bump in your results. It’s not worth it. It might even be an egregious mistake, like catching an investing STD. Now, clearly show Monkey why S will be worth 40% more in three years than CRWD, and you have my big ears open and at the ready to dump my Crowdstrike fianceé and go cavorting with the new strumpet.

We’re not traders. Long-term trust matters.

Hugs,

Monkey (long CRWD)
@Cxddesign on the twitters

[ExponentialDave]

Hey WSM, I too have been thinking a lot about Crowdstrike, which I have sold down to about a 4% position.

Regarding this take here: Also, after having gone nowhere for a year, the stock is down even more recently - now down 60% from its 52-week high, and trading at a similar multiple to Zoominfo, which many, myself included, seem to think is undervalued.

I really like this comparison here between CRWD and ZI. Even though they may have similar multiples these days, I think ZI is decidedly a better stock. There is a reason the market puts such a high premium on companies that a) are accelerating revenue growth or b) at least, they are not decelerating their revenue growth.

In this case, we have ZoomInfo, which is accelerating (non organically) and holding steady (organically), versus Crowdstrike, which is in a long term pattern of revenue deceleration, since as far back as my data goes, which is Q3 2018.

There are some people who can argue, quite convincingly, that Crowdstrike is destined to keep decelerating until it’s basically no longer considered a growth company. After all, revenues have been decelerating quite linearly since 2018, and thanks to the law of large numbers, that deceleration is going to become increasingly likely with each passing quarter.

On the other hand, with ZoomInfo maintaining its growth, making a solid acquisition (Chorus.ai) which may accelerate its organic growth once Chorus.ai is considered part of organic growth (1 year after date of acquisition), who can really say when ZoomInfo will begin to decelerate its revenue growth?

So this is why I’ve been holding ZI but trimming CRWD, even though on the surface CRWD’s valuation may be considered more appealing now than it was pretty recently.

[SaulR80683]

Even with the VERY mild deceleration on some fronts, they are still maintaining

Hi Chris,
Let’s see. Their growth rate fell from 86% the same quarter a year ago to 63% the same quarter this year. Now that is 73% of last years growth (63/86 = 0.73) so they lost 27% of their growth rate in one year. Do you really consider that to be “VERY mild deceleration?” And you use the term “on some fronts.” Well Revenue Growth is not “some fronts.” It’s as key as it gets.

And about “growing subscription customers 12% QoQ at scale and 75% YoY” they’ve made it clear that they are going now for smaller customers so those numbers can’t be translated into revenue. And besides, 12% QoQ compounds to 57% per year, so even that is trending down sharply from the current 75% level.

And as far as Sentinel, they are growing just over TWICE as fast, at 127%, not just some little margin that can be ignored.

Now, as you know I’ve kept a small position in Crowd so far (my smallest), based on hope and probably sentiment, but let’s be honest about what’s going on thus far.

Best

Saul

[foodles]

Apologize for the shorter post, but want to make a correction to one of wsm007’s comments about CRWD so it doesn’t keep getting propagated…

…after having gone nowhere for a year, the stock is down even more recently - now down 60% from its 52-week high, and trading at a similar multiple to Zoominfo, which many, myself included, seem to think is undervalued.

CRWD is actually down “just” 38% from it’s ATH, not 60% (at least so far, the way things are going, who knows what tomorrow may bring).

I still hold a near 15% stake in CRWD (number 2/3 holding), and I thought I would have noticed if it was down 60%. I think of CRWD at this point more like SHOP was at the same time in it’s revenue growth trajectory, a really fantastic company, not too highly valued anymore, that even with the recent rev growth slowdown, is still worth holding (IMO) going forward. But then again, I’m not as concentrated as others here (I typically hold 10-15 stocks). I don’t have the SHOP numbers handy, but IIRC, it was about this same time in it’s rev growth lifecycle, that it showed a “relatively quick” slowdown into the 60% range when most leaders here reduced/sold out completely for greener pastures. Yet SHOP (the stock) continued to do phenomenally, even as growth slowed into the 50% range and lower. I’m not trying to point out that the board leaders here did anything “wrong”, I know they rotated those funds into other great companies that also did fantastic, I’m just saying that for me, I don’t consider 60%+ growth, even if slowing, a bad thing, or even 50% (especially if I have more companies I’m willing to hold).

Again, definitely not saying my method is better than anyone else’s here, if anything I’m usually on the lower end of the results from the board, but I’m comfortable with it.

And one last comment, what a punishing start to this year, after an already bad Nov/Dec, to be down over 10% in the first 2.5 days of 2022 is just demoralizing. The market is doing it’s best to try and make me cry “uncle”, as its very tough seeing every holding I own dropping significantly day after day, after already having been down a bunch (today I hit down 40% from ATH just 2 months ago). I’m hanging in there, but trying times, to be sure… good luck to us all.

[cfee2000]

Thanks for the reply Saul.

I guess the point is, CRWD has been here before (on a quarterly basis), twice in fact. They grew 12% QoQ in Q219, and Q220, and they’ve managed to go up (and back down) from there, but of course with smaller ups.

I did link to this is my previous reply, but here’s a quote from GauchoRico posted just 7 months ago:

It took CRWD (founded in 2011) seven years to reach $170M ARR whereas it took SentinelOne (founded in 2013) eight years to reach $161M ARR; thus, on an ARR basis, CRWD has expanded its two-year head start to three years. Also, CRWD was a much faster growing company when it was SentinelOne’s current size; in addition, CRWD is still growing at a very rapid clip considering that CRWD’s ARR is more than 7x that of SentinelOne. And when considering that CRWD is still adding customers (on a percentage basis) almost as fast as SentinelOne and that CRWD receives about 3x more revenue per customer, CRWD probably isn’t slowing down as a result of SentinelOne’s presence in the market. CRWD is also investing almost 4x as much in sales and marketing efforts which undoubtedly helps with CRWD’s customer acquisition. Despite having substantially all of its revenue coming from recurring subscriptions, SentinelOne has surprisingly low gross margins of 53% (non-GAAP) compared to CRWD’s 79% non-GAAP subscription revenue margin. And looking at SentinelOne’s operating and FCF margins, one can see that CRWD has a much better business; it seems that SentinelOne is having to spend a lot more than CRWD to build and operate its business. When CRWD was SentinelOne’s current size, CRWD had a higher gross margin, operating margin, and FCF margin. In summary, SentinelOne better pick up its growth, improve its margins, and raise the output of its sales & marketing and research & development teams, or SentinelOne may not be able to reach a big enough scale to achieve a high enough operating profitably to satisfy investors. A large part of CRWD’s success can be explained by its expansion of product modules (now at 19) which provide higher and higher gross margin contributions with each additional module sold to any given customer. It likely doesn’t help SentinelOne that it needs to compete head-to-head with CRWD for many/most customer wins.

Most of what was written there is still true, though its fair to say Sentinel One has improved both revenue growth (which fairness in conversation was better than CRWD at comparable total revenue this particular quarter) and gross margins (though on the margin side not materially more than their previous best and still substantially lower than CRWD).

Saul you also acknowledged GauchoRico’s comments in your post here and I think fairly made a harsh critique at the time - https://discussion.fool.com/sentinel-one-8211-a-thought-experime….

Now all I’m saying is that 7 months and 2 quarterly reports doesn’t seem like enough time to assess completely flipped trends (RE: the threads above) unless those trends are super obvious (for example, you were right to point to Zoom’s cratering QoQ revenue growth and I was among those too slow to react to that).

I think there are good arguments to be made on both sides, and ultimately I hope both stocks blow it out of the water, but all things considered, I still think CRWD is a better investment at the present time sans more data to come out.

-Chris

[MAS4R]

I own ZS, CRWD, S both directly and indirectly (in 401k). So I could easily sell my directly held CRWD shares for I own it LTBH indirectly anyway.

The reason I still own CRWD directly is that among 26 companies I follow it has the #6 non Gaap operating margin, #8 non Gaap profit margin, and #5 FCF margin, and its Rule of Forty is 96.

Now, so far, revenue-related metrics, where S excels and CRWD is mid-park at best, have been all that has mattered. But maybe this time is different, and cash flows and such matter on the way up ?

In addition to this kind of diversification between more established and brand new growth, I want to see what fruits the Q3 measures (alliances) will bring in Q4. If I don’t like Q4, I will walk away from my directly held position.