- Purely from a business perspective, CrowdStrike has one of the most attractive stories in the market
- Even after a big sell-off, however, valuation remains a concern
- Investors have stayed patient of late; it's fair to wonder if that will continue
Solely as a business, CrowdStrike (NASDAQ:CRWD) has everything an investor could want. The cloud workload and endpoint security company offers an attractive structure, growing end markets, and the potential for solid profit margins down the line.
As a stock, however, the Austin, Texas-based company still looks a bit dicey, particularly in a market suddenly prizing profitability over growth. CrowdStrike's adjusted numbers suggest positive earnings this year, but the nature of the adjustments is the key reason.
In recent months, investors have focused on the business over the valuation: CRWD has gained 6% since June 1, while the tech-heavy Nasdaq 100 has dropped 12%.
There's some logic to the stock's resilience, certainly. But there's some question as to how long CrowdStrike can hold this kind of valuation in this kind of market—no matter how impressive its business is. In that context, even for long-term investors, there's no need to rush in.
The Valuation Issue
A 41% sell-off from all-time highs reached in November might make CRWD seem 'cheap.' That's simply not the case.
After all, higher past prices don't necessarily mean that lower current prices are 'better.' And it's now clear that investors in November were willing to pay more dearly—in fact, too dearly—for growth. In a more normalized interest rate environment, that demand isn't there to the same extent.
And even if an investor wants to look backward, it's worth noting that CrowdStrike has tripled since 2020.
But the most logical way to assess valuation here is to look at the fundamentals and CrowdStrike's guidance for the year. The company's outlook was raised after the second quarter release at the end of August; CrowdStrike now expects full-year revenue of about $2.23 billion and adjusted earnings per share of $1.31 to $1.33.
Accounting for about $6 per share in net cash on the balance sheet, CrowdStrike has an enterprise value right at $40 billion. And so, the stock is trading at about 18x this year's revenue and 125x this year's adjusted EPS.
But even that latter multiple doesn't tell the whole story. Like most tech companies, CrowdStrike excludes stock-based compensation from its adjusted figures. That compensation is significant: almost 23% of revenue in the first half of this year. Add that back—share issuance is an actual expense, after all—and CrowdStrike remains unprofitable.
Even in this market, the fact that CrowdStrike is unprofitable on this basis doesn't mean the stock is a sell. Still, a $40 billion valuation atop a business still losing money—albeit not burning cash—is something more often seen in a bullish market than a bearish one.
A Wonderful Business
Again, even in this bear market, investors have been willing to keep that valuation up. And looking solely at the business, it's easy to understand why. Almost every aspect of CrowdStrike is what investors look for in a publicly traded business.
The cybersecurity sector is desirable. It's produced a number of big winners over the years: for instance, Palo Alto Networks (NASDAQ:PANW) has returned 860% since its initial public offering a little over a decade ago. As far as software markets go, it's about as defensive as possible: in this day and age, companies can't even cut back on their cybersecurity spending, let alone eliminate it. Even amid belt-tightening at many companies, the industry remains "immune to macro headwinds," as one analyst put it.
Within that sector, CrowdStrike increasingly looks like the "gold standard," as another analyst phrased it. CrowdStrike was the first company to build its entire platform in the cloud. This allowed it to avoid the messy and expensive transition from "on-premise" appliances that tripped up some older companies.
The nature of that cloud business also creates attractive economics. Once a platform like CrowdStrike's Falcon is built, incremental users and accounts are exceptionally profitable: most of the heavy lifting has already been done. Profit margins thus expand quickly, one reason investors have been willing to pay such premium multiples for cloud-based software offerings of all kinds.
Again, leaving aside valuation, this is one of the best stories in the market, bar none. It's precisely the kind of business that investors should want to own and a business that those investors should be willing to pay up for.
Yes, the stock is down big, but a $40 billion valuation still prices in an awful lot of the good news here. It might be worth waiting to see if that valuation can come down while the long-term outlook remains the same. The question is how much to pay up.
Disclosure: As of this writing, Vince Martin has no positions in any securities mentioned.