CrowdStrike Holdings Has a Premium Valuation. Buy it Anyway
In the week after CrowdStrike Holdings reported earnings, CRWD stock is down nearly 6% (5.8%). Investors have long been concerned with the company's p...
In the week after CrowdStrike Holdings (NASDAQ: CRWD) reported earnings, CRWD stock is down nearly 6% (5.8%). The earnings report was strong with CrowdStrike beating on both earnings and revenue.
Since debuting in June 2019, the stock is up 320%. However, investors have long been concerned about the stock’s premium valuation. And that appears to be driving this current dip in CrowdStrike stock. In fact, while short interest remains low as an overall percentage, it has increased by approximately 15% in the last month.
That would be consistent with the volatility in CRWD strike over the last 12 months. But every time the stock has dipped, it’s come back stronger than before. That's likely to be the case this time as well.
The Numbers are Favorable
Total Addressable Market (TAM) is one of the key performance indicators for software-as-a-Service (SaaS) companies. And CrowdStrike continues to climb over what is an increasingly high bar.
According to Grand View Research, the global cybersecurity market in 2020 was valued at $167.13 billion. From February 2020 through January 2021, which is CrowdStrike’s fiscal year, the company posted $874.45 million in revenue. That was over 50% of the total global revenue.
From 2021 through 2028, cybersecurity revenue is expected to grow at a CAGR of 10.9%. And in the first two quarters of 2021, CrowdStrike has delivered $640.49 million in revenue which is 69.8% higher on a year-over-year basis.
The Network Effect
But while the company’s numbers are impressive, it’s fair to ask the question why? One reason that supports a bullish outlook for CrowdStrike is its network effect. This means that every new customer provides CrowdStrike with a source for potentially new threat information which makes CrowdStrike a security force multiplier.
Here’s how that works. As more companies sign up for the service, the company’s Security Cloud which has machine learning capabilities becomes smarter and faster. More data provides a deeper, more actionable understanding of the threat landscape. In fact, according to CrowdStrike, this can stop attacks without malware signatures or previous knowledge of the malicious file.
This also means that companies that don’t sign up with CrowdStrike find themselves at an increasing competitive disadvantage (at least by perception).
What Threats Exist?
One of the major threats, of course, is that growth will slow down. On a GAAP basis, CrowdStrike is not profitable. And so any slowdown in revenue growth would perpetuate that reality. As pointed out above, that hasn’t been the case so far in 2021. But the threat remains because the cybersecurity sector continues to get crowded.
A smaller competitor, SentinelOne (NYSE:S) takes a hybrid approach to cybersecurity, combining both on-site and cloud-based services. Although the company claims that this is faster and more reliable than CrowdStrike’s cloud-native approach, that narrative will be tested if enterprise companies continue to delay return-to-work plans.
Another threat comes from Palo Alto Networks (NYSE: PANW). The company is seeded in many companies as the market leader in on-site firewall appliances. But, in recent years, it has expanded its offering to include cybersecurity services.
Analysts Are Bullish After Earnings
According to MarketBeat data on CrowdStrike, fifteen analysts have raised their price target for the company after the earnings report. Of those, 14 give CRWD stock a price target well above $300. That is something to consider as you look at the consensus price target for CrowdStrike which is $291.46 at the time of this writing.
And, CrowdStrike was recently added to the Nasdaq 100 Index. This makes it likely that institutional investors will add the stock, particularly to mutual funds and exchange-traded funds. If that occurs it will only serve to support the company’s lofty valuations.