I’ve spent some more time with CRWD’s earnings report from a couple weeks ago, and I’m not liking what I see.
An important part of why our stock picking works is because the best companies typically exceed expectations more than not. In the big 2020 - 2021 run up, expectations went higher and higher, and share prices with them. That’s obviously been reversed in 2022, and not ONLY because of macro. 2021 valuations implied that many people (including us to some extent) believed many of our companies would grow at 50%+ forever. “Or if it’s 48%, no biggie.” But that expectation has changed quickly for Crowdstrike. They said that net new ARR would be down about 10% next quarter and then about flat next year. If you take that to mean they’ll add about 800m in net new ARR next year (flat with where they’ll end up this year – they’re at 610m and promised 180m in Q4), that means roughly 32% growth next year (calendar 2023). Sure, we and everybody expect they’ll beat that, but it won’t be 40%+. And sub-40% growth next year is a lowering of my (and probably everybody’s) expectation. I’m guessing that’s why the stock got hammered.
The big question is, what will happen in 2024 and beyond? That depends. Is Crowdstrike seeing this slow down because of temporary external conditions they foresee in calendar 2023? Or because of competition? Or perhaps because the endpoint security market is more saturated than we thought? We need to think about these kinds of questions before growth slows with any company. Unfortunately, with endpoint I have always worried that disruption is a bigger risk (thankfully – hopefully – not shared as much by SNOW or DDOG or BILL). So maybe that is happening, or maybe not…“could just be macro.” But maybe at this point it’s all academic, because…
Do we even really need to know why growth is slowing? It’s happening whether we know why or not. We’ve seen this movie before – at this scale Crowdstrike is not likely to reaccelerate to 50% growth in 2024…or ever. Will Zoom do that? Docusign? Of course not. At some point growth slows and doesn’t come back…realistically we weren’t ever going to stick with Crowdstrike for the next several years, anyway. I feel a bit like Icarus here. I thought I could make some money (thanks to Crowdstrike’s strong cash flows) for another year or two while growth slowed gradually from 60% to 55% to 50% to 45% etc. Turns out that isn’t the case. Life comes at you fast.
At the current price, I’m inclined to wait for an up day to sell out of CRWD, but I’ve already trimmed it from 12.8% to 8.0%.
If anyone has insights into my above questions about endpoint, I think they’re also pertinent to SentinelOne.
It’s also probably a good idea to go through the “what if” scenarios for growth slowdowns (ie, do we believe they’re temporary or not?) for our other companies…especially ones approaching the scale Crowdstrike is at, like DDOG and SNOW…maybe even NET. (Spoiler, I do not think any of these are close to saturation or slowing to 30-something percent growth…I think their opportunities are larger than CRWD’s…but I’d love to hear other opinions).