A few times recently I have been asked what I look for in a stock from a numbers perspective. I think I have boiled it down to 3 things:
- Pace of growth - I mostly look at the revenue growth rate
- Future potential - I mostly look at market cap
- Price - I mostly look at PS ratio
Now, these 3 things from a numbers perspective are only part of the picture. The intangibles also weigh heavily. Margins are key. Recurring revenue is crucial. These are prerequisites. So one can never start with the numbers. The numbers are just the lens through which I view any companies that make the cut on all the other stuff.
Also, I try not to fight the market – if a stock is running up, I try not to sell too much. If a stock is getting sold off, I try not to buy too much. This is more art than science, and something I’m trying to learn from Saul.
Lastly, valuation and other metrics are relative. I don’t know if CRWD is worth 25 billion or 50 billion or 100 billion, but I know it’s not worth more than Salesforce or Google or Amazon.
Crowdstrike passes the intangibles with flying colors. When we look to the numbers:
- Pace of growth is awesome. Revenue growth rate around 80 - 90% consistently. I think it will slow a little soon, but still be top of the line.
- Future potential – still tons, but not as much as a small cap. The market cap is $50 billion. That puts it in the category where it’s definitely no hidden gem, but it could easily double or triple in the next few years (but probably not 10x unless they really do something unexpected).
- Price is very high. Trailing PS ratio is around 65. Run rate PS ratio is about 53. And even if they could keep up 70% growth next year, the PS would still be in the 30’s at the end of 2021 (if the share price stayed where it is).
On 10/31/2020 CRWD was at $123.84. I thought it was a little undervalued, but not some cheap and overlooked stock. And it almost doubled in less than 2 months. It was close to $230 last week, and I just thought, wouldn’t it be a little silly not to be trimming? I feel if you are going to allow positions to grow to 20%+, you have to know when to trim. I may be wrong…maybe it goes to $300 in January, or who knows, it could go to $500 and be valued like SNOW. But I’ll let someone else hold it if that happens. No company, however amazing they are performing, is worth falling in love with, or buying at any price, because even the greatest companies can stumble.
The flip side: this is my #1 position right now, my favorite, and the stock I would buy first. The company is growing the fastest, innovating incredibly, and finally appreciated. There’s nothing wrong with the company…it’s simply that the stock market has caught on to that fact. At a $50 billion market cap, CRWD doesn’t deserve a 20%+ allocation. I believe Crowdstrike will continue to succeed, but a ton of that success has already been enjoyed by CRWD shareholders.
CRWD was a 21.7% position for me last month, and I have cut it back to about 15% now. It is still my largest position.
Hope this makes sense. I am constantly trying to learn and update my thinking. I could justify an almost 25% allocation when CRWD was a no brainer on all 3 valuation metrics I look at. But now that it’s not, I think 15% is more reasonable.
PS - I don’t want to focus or worry too much just because of the 60+ PS ratio, but I will note that since DDOG got up there in June/July, it’s gone sideways for 6 months since.