Why I trimmed CRWD significantly

Investment Analysis Clubs Saul’s Investing Discussions
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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:

  1. Pace of growth - I mostly look at the revenue growth rate
  2. Future potential - I mostly look at market cap
  3. 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:

  1. 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.
  2. 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).
  3. 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.

Bear

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.

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Hugely important note: I will not respond to questions about portfolio management. It doesn’t matter so much that I trimmed, or what my allocation was, or whatever. What I really wanted to focus on in my post: the potential I see for CRWD at this time, based on the numerical metrics I look at for great companies that I own. If you have reasons you think CRWD will accelerate or slow, or other company specific thoughts, please share – that’s what this board is for. But let’s not discuss why I hold a certain percentage. That was simply to give context. (I’m working on my year end portfolio review.)

Please, please, please – let’s focus on the company if we’re going to discuss anything I said.

Thanks,
Bear

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how much this reason for selling is like or unlike your selling of Pinterest around mid year? From there, PINS went up as much or more than many of the stocks we talk about in here.

and why don’t you sell NET? the NTM revenue growth is definitely smaller than CRWD or some other stocks discussed in here.

tj

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Bear,
Thanks for sharing your thinking and helping us look under the hood a bit to understand your approach better. There are two things you didn’t really mention in your approach that I think are worth discussing here. The first is where TAM fits in. In the case of CRWD, I think there is a large and growing TAM. The recent hack exposed as vulnerable a lot of entities that thought they had security figured out. As a result, I see more of the TAM in play than before, with CRWD very well positioned to benefit.

The second factor you didn’t mention is how readily accessible quality information is about the company and what it does. I added to my CRWD allocation before the hacking event because I see a large TAM. I had the confidence to do so because of the quality of information about both the financial and the technical aspects of what the company does and how it does it that are available here in this forum. It is hard for me to have the conviction to allocate a high percentage of my portfolio in a company whose business I don’t understand. That is one of the things I get here from folks like Muji (and others). There are other rapidly growing companies out there with much smaller market caps, but if I don’t have a way of really understanding what they do and how they do it relative to their competition, I won’t do more than dip a toe.

Thanks much for your continued contributions to the board. We are all better investors because of them.

Dorset

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Not sure if you deployed the freed up capital in ETSY or you had other stocks you could allocate the freed up capital to. I sold ETSY to buy CRWD.

For CRWD I believe the recent hacks and the significant news exposure they received will ensure that money will continue to flow into security and will be a priority for many IT departments in 2021 budgets. CRWD is the best security provider out there. I believe it will mean more CIO’s will gravitate towards CRWD than go for other options. I also do not see a significant challenger to CRWD from a pure security angle, sure there may be implications we may have to consider with other companies bundling in security with their services which might have been a challenge in a pre hack scenario but going forward I expect IT departments to prioritize security and ensure they buy best of breed products in that arena.

I think we may be underestimating the tailwinds CRWD will get in 21 budget review cycles from IT departments. The CYA mentality will ensure that CIO’s will gravitate towards CRWD as a default provider for enterprise security needs

Thanks
Mike

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Very kind words, Dorset, thank you.

Also I agree, a company’s TAM (which is kind of a guess, right? No one can really know) is very important. I wouldn’t expect Asana to have a $50 billion TAM. Crowdstrike, maybe so. Another thing is optionality. Another guess. It’s also hard to guess when a company might make an acquisition like Twilio did with SendGrid, and how well that will work. That can add to a company’s value if done well. And as you point out, information availability can help your confidence level.

All this kind of corresponds to my “Future Potential” metric, for which I look at market cap. But depending on all the other stuff above and much much more, I judge whether the market cap is generous or a bargain. More guesswork. I feel like there’s a balance between seeking huge potential, and trying to discern how much of that potential is baked into a company’s valuation already. An impossible task, which is why I’m not selling CRWD based on my guesswork…and so far haven’t even demoted it to my #2 position.

Bear

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Bear - If within the next 4 quarters the PS ratio drops down to the mid 50s and Y/Y revenue growth slows to 75%, I could still see CRWD as a 50% gainer from today’s prices. I think that’s being fair, and not overly optimistic. Perhaps revenue remains north of 75% (I think it will). That being said, I believe you look for companies that can double or triple each year. I think with the metric expansion we’ve seen in 2020 that finding stocks that can double in a year will be tough! I’m staring at the valuations in my portfolio and not seeing it. Thoughts?

-AJ

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Love your Bear nickname.

Thanks for sharing your way of approaching this.

There seem to be two inconsistencies though:

1/ You don’t want a portfolio management discussion but apparently that’s why you trimmed. The entire first post is really about appropriate allocation relative to valuation since the rest about the company is fine to great.

2/ I have to go back to the KB to be sure, but my take is that Saul is so successful because he sticks to the evidence alone. He does not make guesses. So he dumped FSLY for example (I was busy and apparently missed a lot of interesting threads and posts!) not due to valuation but due to what happened with revenues/company execution. Totally consistent with what he says in the KB. This is not just a matter of being retired already vs having a long ways (supposedly; I never forget I can be killed in an accident/by disease tomorrow and that’s a key part of how I live and plan–way before the 2020 pandemic was a thing). It is a matter of evidence vs conjecture and guesses.

“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.”

Portfolio allocation and, besides, if the approach is indefinite holding, does it then really matter if a company has 10x potential from here? If indefinite holding means in practice 6m to 3 years, then the 10x issue per company becomes irrelevant since it is the cumulative 2x-s and 3x-s that happen comparatively fast that make the entire portfolio 10x instead of waiting forever for Company A to 10x. For me, the latter is how I think of my “David Gardner” positions: those need 10x potential and have extremely long leash. But for those for which I am considering using Saul’s approach, which are SaaS, why would it matter to me that due to its 80B cap SNOW may not be capable of 10x-ing over 10 years (outside of a bubble) if it does something very hard and very important all the while executing as best as it can be? And so long as that remains true. The latter is knowable through the metrics Saul focuses on whereas the former is speculation.

I like the pure versions of both Saul’s and DG’s approaches because both avoid, in extremely different ways, the pitfalls of trying to time things through guesswork.

Then, again, as a matter of portfolio allocation, one can decide to just mechanically trim at a certain % as a standard practice and not worry about needing to justify the decision through valuation.

Just my 2c.

Happy 2021!

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I think you trimmed too prematurely.
CRWD has no sign of slowing down yet. Price over static NTM revenue is around 50 when it’s growing revenue at 80% per year. I consider it’s slightly under valued. On top of this, Russia hack is a substantial tail wind for CRWD for next year. On the other hand, DDOG revenue growth is obviously slowing down. This is not a good comparison.

I screened through hundreds of growth stock. CRWD is one of my 6 holdings but not NET, not DDOG, not ZM.

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Bear,

I read most of all of your posts in the last 2 years or so. This is probably the first post that I can say actually made be a little irritated and ill explain why per your points.

  1. Pace of Growth
    You are speculating the growth will slow soon, what is your logic that it will slow although it will be top of line? This same argument can actually be used with any current Saul board stocks, ZM, DDOG, NET etc so what is the relevancy for you to trim CWRD vs any other current stock holding?

  2. Future Potential.
    You are speculating on future potential. Technology is always changing and evolving. In the realm of ‘tech’ there is often unlimited optionality. I see this especially in the the realm of ‘protection’. I don’t see cybersecurity as limited. It is not just the end point protection but all types of new access technology points, methods, and other advances that requires new protection measures. In my opinion you are wrong here. Something more limited is like ‘communications’ potential for ZM - there are limited ways in which we can improve video conference, message chat, and share files.

  3. Price is very high
    Saul does not look at price or valuation. Although you are one of the few respected board members that look at valuation. Does anyone else see ZM, SNOW, DDOG, NET as reasonably valued? valuation is hinged upon the future potential prospects of growth and This was the same mistake I made regarding OKTA, thinking for over a year without being convinced that an identity and single sign on company could be valued so highly, because after all we are only just talking about a single-sign-on ease of use platform.

The question I have is, why are you holding these same 3 standards to your other holdings? Are you getting influenced by the noise of cyberattacks and added speculation to cybersecurity stocks and wanting to reduce this risk vs rationalizing what you see as limited upside? Anyways, I would be interested to read your thoughts in more detail to my response… and sorry if this post sounded harsh, it is new year eve and I’ve had a few flutes of champagne!

Best,
TexasTitan

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Hi Bear,
My position in Crowdstrike is up to 34%, which is MUCH higher than any position I can remember having anytime in the last ten years, at least, and yet it has never occurred to me to trim it. In fact, I couldn’t help myself and even added little bits this month at an average price of $159.

Drew, as you point out yourself, they are doing everything right. They have octupled their Annual Recurring Revenue in three years! They accelerated revenue growth this last quarter, in the middle the pandemic even. Their free cash flow rose from $7 million to $76 million this quarter, yoy. Subscription customers grew 85% from 4561 to 8416, and they added 1200 customers in the quarter, in the middle of the pandemic! And they are in the right place at the right time, with all this breach stuff hitting the news.

Drew, I think that you are driving yourself crazy obsessing over EV/S ratios, especially looking at trailing year ratios on companies growing at 86%. This is a company which is well on its way to be a dominant tech security company and is hitting it out of the ballpark. With their AI and using all previous bad actions and applying protection to all their companies at once with any new one, no one without that huge library and stable of customers can compete with them. I just think that how a company is doing, and how it is likely to continue to do, is what I make decisions based on, and EV/S is just static noise.

Best, and happy new year,

Saul

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This is a company which is well on its way to be a dominant tech security company and is hitting it out of the ballpark. With their AI and using all previous bad actions and applying protection to all their companies at once with any new one, no one without that huge library and stable of customers can compete with them.

I think you’re right that Crowdstrike as a company will continue to do awesome – and I’m not worried about competition, either. SoonerAJ gave a very reasonable scenario up-thread: If within the next 4 quarters the PS ratio drops down to the mid 50s and Y/Y revenue growth slows to 75%, I could still see CRWD as a 50% gainer from today’s prices. I agree with him that this is possible, maybe even likely! (Of course, that would put the market cap at about $75 billion! just 1 year from now.)

But that’s likely the best case. A 50% gain in the next 12 months would be great, but don’t other companies have the same (maybe even more) upside? Maybe there is very little risk with CRWD – perhaps they’re un-hackable – but there is still not zero risk.

I guess I’m just trying to take a balanced approach. I don’t want to veer into portfolio management, but Saul, it’s more than one third of your portfolio!

Bear

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Bear,

I am more in your camp of not fully tossing out valuation, I do believe it is important. For what it is worth, the metric that has helped me with these companies is EV/GP/%Growth. EV is straight forward. GP is gross margin times annualized revenue of most recent quarter. Growth is the actual percentage value for yoy revenue growth. Currently I gauge whether it is below 1, this could change.

Example:
CRWD
EV/GP = 66.4
EV/GP/% = 66.4 / 86 = 0.77

FSLY
EV/GP = 53.7
EV/GP/% = 53.7 / 42 = 1.28

NET = 1.04
PINS = 0.50
DDOG = 0.97

To me PINS is underpriced for it’s growth rate so I am currently buying more whereas FSLY is still very expensive even after it dropped 15%. The reason I like this metric is it does a great job normalizing. A company with low growth rate and low gross margin could look cheap with a low P/S but EV/GP/% would show it’s true colors. Since you value valuation (pun intended) I thought you might appreciate this approach.

-Junomean2

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I know Saul doesn’t like to take valuation into consideration, but let’s be honest, stocks can be pumped up to ridiculous valuations, in which case one of two things will happen: either the price comes down over time (except no-one knows when, and by how much), or they can [re-]grow into their valuation.

Clearly, the SaaS companies we are focusing on here have a good chance of growing into high valuations, simply thanks to their enormous growth rates. But at the same time, there is only so many years that you can double your sales, just think chess board and rice corn.

My take-away is that these are essentially momentum stocks. This board tends to do a good job at identifying them early on and benefiting from the momentum building phase - which is the one delivering the highest returns. But inevitably, there will come an inflection point, which is precisely when growth rates start declining. ZM is a case in point. At that point, momentum stocks get punished severely, and one of the reasons Saul is so successful (in my mind) is that he clearly identifies these inflection points and gets out very timely.

CRWD hasn’t hit this inflection point yet, which is why I think there is no reason to get out now. But I think it’s a case for the watch list.

And also - whenever you trim one allocation, the big headache is where to redeploy your funds. Companies with CRWD-like growth rates AND their performance as a company seem to be the safest bet one can make at the moment, and I don’t really see the alternatives. The one thing I like most about Saul’s monthly recaps btw is exactly the fact that he shares with us the choices he makes, and why - not just what he sold, but also what he found to be a better alternative at that time.

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My take-away is that these are essentially momentum stocks. This board tends to do a good job at identifying them early on and benefiting from the momentum building phase - which is the one delivering the highest returns. But inevitably, there will come an inflection point, which is precisely when growth rates start declining.

It is common to read people confusing growth with momentum.

Momentum stocks are those people pile into because of the price movement of the stock, company performance is not a consideration.

Growth stock investing takes into consideration the company fundamentals, especially the growth in revenue. TAM, GM%, retention rates, cash flow, etc are also frequently considered. Momentum can be a feature of growth stocks, but only a single feature in a much larger universe.

Happy New Year.

Lee

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Clearly, the SaaS companies we are focusing on here have a good chance of growing into high valuations, simply thanks to their enormous growth rates.

Sorry luciuse, but THAT IS PLAIN WRONG!!! You have missed the whole concept of why we buy SaaS companies, and clearly haven’t read my end of the month summaries the last few months.

High growth rates are just one reason that they have high valuations. Nearly as important are high gross margins (70’s to low or mid 90’s in some cases). But you are also missing what SaaS companies are all about. I’m talking about recurring revenue. What a difference between having to sell twice as many refrigerators next year to have 100% growth, and a SaaS company having all of last year’s sales still there repeating next year. But wait! It’s better than that! They have dollar-based retention rates of 125% to 140% for the most part so last years customers will buy 25% to 40% more next year than this year. And lets not forget the light touch of low capex. The refrigerator company has to build a new factory if it gets 100% growth. A SaaS company does it all over the internet. That also usually means no debt, to add to all the happiness.

Hope this helps,

Saul

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Are you getting influenced by the noise of cyberattacks and added speculation to cybersecurity stocks and wanting to reduce this risk vs rationalizing what you see as limited upside?

I think that is definitely driving momentum with the stock price. Plus any company that claims they use AI (no such thing) is doing foolish marketing at best. Still a great company though.

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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.

There’s no doubt that today’s CrowdStrike should not be worth more than today’s Salesforce or Google or Amazon, but all the companies are still growing! There may be one day in the future that Google would have today’s market cap of Amazon, Salesforce would have today’s market cap of Google and Crowdstrike would have today’s market cap of Salesforce.

IMHO, when applying P/S valuation to growth company, the future rate of growth is the key.

Let’s say there’re two SaaS companies: Company A has 60 trailing P/S, is expecting to have 60% CAGR in the next 5 years, and the YoY growth rate drops to 40% in 5 years; Company B has 30 trailing P/S, is expecting to have 40% CAGR in the next 5 years, and the YoY growth rate drops to 30% in 5 years. Let’s say both companies’ P/S ratios will drop significantly in 5 years: A’s drops to 20 (unlikely for a company with 40% growth rate still but let’s assume the market has correction for SaaS company); B’s P/S drops to 15, which is reasonable given it’s growing slower than A.

In this case, each dollar invested in A today will become 3.5 dollars in 5 years, while each dollar invested in B today will become 2.69 dollars, if my math was correct. This is annualized return of 28.47% VS 21.89%. Investing A today would still beat B, even though its future P/S drops more.

It’s impossible to know whether CRWD will be a company with 60% CAGR in the next 5 years, but so far, it’s growing really fast and I think it deserves a much higher P/S ratio.

Best
Luffy

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Canonian,

Plus any company that claims they use AI (no such thing) is doing foolish marketing at best. Still a great company though.

I don’t want to embarrass you or start a big argument but to say that there is no such thing as AI ranks right up there with the “Earth is Flat”. Of course there is such a thing as AI.

https://www.forbes.com/sites/bernardmarr/2019/12/09/the-10-b…

Andy

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You finished your rebuttal with a statement that the programmers are still writing the code. That’s less true than you’d like, for your side of just what “AI” means right now. And, yes, I agree that “AI” gets tossed around by many marketers.

• Within the realms of cybersecurity, the heuristic analysis algorithms spot behaviors not code-objects. (see https://en.wikipedia.org/wiki/Heuristic_analysis )
• DataDog, Elastic and others offering “observability” are maybe less heuristic at present, but at their heart, their aim is to automate away expensive IT workers.
• As of already 4 years ago, Google has a “Translate” project that can write its own (as yet bad) programs. (read https://www.nytimes.com/2016/12/14/magazine/the-great-ai-awa… )
• 5 Dec 2020 Mr. Smelly Perfume ‘promised/predicted’ (yet again, to many of us) that L5 Autonomy will be available, in 2021. Autonomy would be nothing if not “AI” in both the marketing sense and a revolutionary computing sense. (read https://www.businessinsider.com/elon-musk-interview-axel-spr… )
• It stands to reason, that if L5 Autonomy is anywhere close, then truer “AI” exists for smaller purposes already.

You are arguing, it seems to me, for a very strict definition of “AI” as something that can do what humans cannot, or as something that can perform like the best human. But, since so many workers are not the best in their fields, even your marketing-level “AI” can replace an awful lot of them. Those workers cannot do what software can do, now, except that they can eat sandwiches, watch movies, get distracted by personal problems, etc.

I can raise my head right now and ask any of several devices in my home to perform significant tasks for me. Most of those required me to teach them a little, but after a couple years of them doing those things for me, and me layering up more routines, what is accomplished automatically is more than I would check and do every day on my own. “She” is honestly more useful than my 20 year old on a day-to-day basis, and my dreams for my 20 year old are that he get a job and go eat sandwiches somewhere else, someday!

Happy New Year

-Another Rob

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