Why I wrote about CRWD if I’m not in it?

Investment Analysis Clubs Saul’s Investing Discussions
#1

Why I wrote about CRWD if I’m not in it?

People have asked why I wrote a negative post about Crowdstrike if I’m not in it and wasn’t thinking of entering it. Well I often write about companies that I’ve exited, sometimes warning others about them. Zoom is a recent prominent example that I can think of off the cuff. But that wasn’t the story with Crowdstrike. I wasn’t warning against them so much as I felt disappointed in management. Here was the deal:

I hadn’t removed myself from Crowd’s mailing list, because they were a company that I was still interested in, as an old friend that I might get back in again in spite of their plummeting growth rate (I still might). Well about two weeks ago I started getting a series of alerts from them about their upcoming investors’ conference coming up Thursday, April 7th, after the market. Then right after the market closed on Thursday, they announced the approval by the Defense Dept.

I wasn’t able to immediately watch the investor’s video but I looked at their Investor Presentation slides. I saw their $5 million goal and their last 5-yr CAGR of 94% for revenue growth, 97% of ARR, and 105% of subscription revenue growth, 105% of total customers. Very impressive.

Then I saw their goals of $3 billion ARR in FY2024 and $5 billion in FY2026 and was impressed by them, and I liked their free cash flow, operating margins, gross margins, etc, and I liked their Defense Dept approval. I could see accepting them as no longer a hypergrowth company, but a fairly rapidly growing profitable one.

I watched their video and saw more of the same. I started thinking seriously about taking back a small position. But then I started thinking about the numbers they were presenting…

Why were they tooting their horns so loudly about LAST 5-yr cagr of 94% for revenue growth, 97% for ARR, 105% for subscription revenue growth, and 105% of total customers, when none of those numbers were anywhere close to valid any more. For instance, nowhere in those graphs did they point out that FY2022 revenue growth and subscription revenue growth were 66% and 69%. What did 94% and 105% have to do with anything NOW??? It just didn’t seem like quite honest to present it that way.

And then I came to the Goals for ARR. I pulled out my calculator to see what they were actually predicting and (with correction from the board), I found out that they were forecasting four years at 30% growth! But they were touting the $5 billion goal on several slides in huge print like it was the greatest thing since sliced bread! What were they thinking? Were they so focussed on saying how great the company was that they didn’t look at what they were saying?

I would assume they will grow at least 54% this year, which is 24 points over that 30% average. But that means that the other three years would have to average, each year, 8 points less than 30% growth to make up for that. What kind of a crazy “wonderful” prediction is that.

Look at it another way: If they decelerate rapidly and grow only 50% this year, and 40% next year, and 30% the third year, and just 20% the fourth year, they’d STILL be well over $5 billion. Is that such a wonderful prediction?

So I’m not dissing the company’s business. I’m dissing management’s bragging in an investor presentation about 100% CAGRs that have nothing to do with the current company, and very under-emphasizing current results. I’m also dissing management bragging about a four year goal that is so low they can’t possibly miss it. Which is so low that it’s silly to brag about it.

This is a management that brags a lot. It’s just the CEO’s style. I don’t mind that because they have a lot to brag about.But this presentation just makes me a little more unsure about how much I can believe about the things management brags about, when they are not about current actual numbers.

I hope that this clarifies my thinking somewhat.
Saul

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#2

Saul,

2 things come to my mind after reading your post:

  1. How much of it is driven by your decision to sell CRWD and buy S (and CRWD has since gone up, while S has been in free fall)?

  2. How much of it is driven by the stress from this prolonged market downturn, especially given your position as the public face of this board?

The thing is this: your complaints about the Investor Day Presentation are not even fundamental or rational. SaaS management gives low-ball targets all the time and as pointed out elsewhere, the $5B is not even a target, just an arithmetic exercise to show how easily it can be exceeded.

You know DDOG guided to 37.5% for 2021 initially but proceeded to deliver 65% growth for that year? also SNOW guided to $10 bn (30+% annualized growth) in their Investor Day last year when they are doing 100+% YoY? That’s what lowball means. Let’s all show some indignation here, shall we?

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#3

I almost never post to this board despite following Saul from day one of this board and before when he saved many of us money and grief with his clear analysis of a poor SA pick and why it would never make money (Years later that pick is still way under water). Already too much chaff and not enough wheat so sorry for this post.

But I want to strongly encourage Saul to keep posting the thought processes that go into his investing decisions. He has a “secret sauce” which has made him an incredibly successful investor and I always appreciate a peek behind the curtain. I’m not even going to debate wether or not his complaints about management are “fundamental or rational”, I just think it’s great to see all the factors that Saul uses.

We don’t have to speculate about why Saul has concerns about CRWD, he just explained them and weighing his perceptions about management are perfectly legitimate reasons.

We each get to decide what factors go into our own investment choices and I am just extremely grateful Saul continues to share his thoughts, in spite of the fact that he is “the public face of this board” putting him under constant scrutiny.

Thanks Saul.

David

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#4

I almost never post to this board despite following Saul from day one of this board and before when he saved many of us money and grief with his clear analysis of a poor SA pick and why it would never make money (Years later that pick is still way under water)

I have to thank David (CMFdrdm) for his comments, and to add a thought to what he said, that is: To become a real investor you have to be willing to listen to criticism of your companies. As I wrote in the Knowledgebase, the most angry I’ve ever seen people on these boards is if you criticize a company that they have fallen in love with. Falling in love with companies is a losing game.

The company he is referring to above, which is still under water, was Westport, an unfortunate MF pick, which I pointed out back in 2013, when it was selling in the low $30’s per share, that it couldn’t break even, even if it quadrupled or quintupled its revenue (it had gross margins of 27%, and its losses were roughly 125% of revenue). Many people became very, very, emotionally angry at me for pointing this out, and as it fell they kept “adding at a better price point” and “doubling down” at half the price. It was at $1.46 when I looked a few minutes ago, down from $32.00 or so. Wow!

And please note that I was not suggesting anything like that with Crowdstrike! I wasn’t telling anyone to sell it. I made clear that I was impressed by their numbers and was considering taking back a small position, and that I still was considering it, but that I was disappointed by the optics that management was using, in tooting their horns over five year old metrics that were not related to the here and now, and in waxing exuberant about a forecast that was so low that it was silly.

Again, be willing to look at points of view that criticize your companies, and don’t fall in love emotionally with your companies.

Best,

Saul

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#5

this is massive future de-acceleration as noted by Saul, very likely though that number will be beaten but still this looks to be something serious. I think a note to investor relations is warranted seeking clarification.

now my question is if this is result of company deciding to increase profit margins and deliver to share holders or a result of anticipating competition to take some pie or reduction of TAM.

in other words, I am trying to understand if this trend will impact our other companies. How do we figure this one out?

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#6

I am with Saul on this one. When I first saw the numbers from the original thread, I too pulled out my calculator and saw the massive deceleration and was honestly shocked. I was too sheepish to post about it being a relative lurker (although glad I came to the same conclusion as Saul to know I am finally getting the hang of this).

The point is though, I feel like this did more harm for CRWD than good. I thoroughly love the company and it was #1 for a very long time. This company no doubt is going to be strong given their platform and team. I too recently thought about splitting my sentinel one position in half and putting the other half back in CRWD.

But this guidance really reinforces the fact I think I made the right call trimming and getting out. I do think unless something goes horribly wrong you can’t go wrong owning any of the top cyber security names - it is that critical of a sub sector of the economy for the very long foreseeable future.

However, if a novice hypergrowth investor like myself notices that this raises more questions than it answers, it makes one wonder if management knows something we don’t. And even if they don’t, that uncertainty does not project confidence. The forward projection was meant to impress but it left me feeling underwhelmed about their own confidence. And if I am still a shareholder I am reconsidering my allocation after this. When/if a company decelerates that hard, Saul teaches you have to be ruthless. And so now, instead of owning CRWD and holding until something changes, I have flipped mentally to NOT owning CRWD until this guidance turns out to be false. Two very different postures obviously, but that’s what management did here for me. I would rather own Sentinel.

At any rate, I sent the IR team a question and will be happy to hear back and report what I find out.

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#7

The company he is referring to above, which is still under water, was Westport, an unfortunate MF pick, which I pointed out back in 2013, when it was selling in the low $30’s per share, that it couldn’t break even, even if it quadrupled or quintupled its revenue (it had gross margins of 27%, and its losses were roughly 125% of revenue). Many people became very, very, emotionally angry at me for pointing this out, and as it fell they kept “adding at a better price point” and “doubling down” at half the price. It was at $1.46 when I looked a few minutes ago, down from $32.00 or so. Wow!

Someone just emailed me the following, which I am reprinting without his name for his privacy:

Saul,

Westport certainly brings back memories.

I purchased six equal size positions: $21.24, $25.46, $27.96, $17.85, $10.96, $6.60.

I finally sold it all at $1.88 for an overall return of -89.75%.

Very educational that was.

XXX

Again, be willing to listen to negative comments about your stocks (I’m referring to those with figures and reasoning, not to the trolls saying “All your SaaS companies are going to Zero.”)

I made those unpopular, and even loudly hated posts on the WPRT board when WPRT was over $30, and anyone following WPRT was aware of them because they got a lot of attacks, so XXX “could” have sold out at $30 instead of $1.88. And it’s not only the 90% loss, it’s also the opportunity cost of the years he held when he could have been in a stock going up.

Just for a recent example, remember how mad some people got at me when I pointed out that if Fastly was getting 10 new customers in a quarter while Cloudflare was getting 800, something was wrong! People screamed at me on the board: “Fastly has the best tech! etc”. (It fell from a $126.58 high in Oct 2020, to $18.56 today. It’s 14.7% of its Oct 2020 price) Again, be willing to pay attention. Don’t fall in love with a stock.

Saul

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#8

Hi catsunited

You like CRWD, Saul has chosen S. What is the big deal. Everyone is entitled to their views.

Pointing out the relative performance of one over the other is immature. I like this board as so many boarders put out their portfolio performances in open with no monetary benefits to themselves.

You can choose what you like and ignore what you don’t like. Gold is never spurned even if lying in muck. However, here everything is gold with minor specks of dust.

Also, the market is much bigger than this board. This board alone cannot influence any stocks performance or non-performance over a sustained period.

Just Chill.

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