CrowdStrike: Great Company But A Bad Stock
Summary
- CrowdStrike is the leader in the future of cybersecurity, and the company's potential doesn't end in cybersecurity. The acquisition of Humio adds even more potential in the data management industry.
- However, the greatness and the promising future of CrowdStrike do not justify CrowdStrike’s current valuation.
- The company is trading very rich during the time of increasing market turmoil.
- Investors should wait for the stock to see a correction before investing in this company.
Investment Thesis
CrowdStrike (NASDAQ:CRWD) is one of the fastest-growing cloud-based cybersecurity service providers with immense potential. I truly believe that the company has healthy financials and immense growth potentials. However, I do not think that the greatness of this company can justify its extremely high valuations considering the market sentiment today. I believe CrowdStrike's current situation is the good company, bad stock phenomenon. CrowdStrike is a good company, but it is not a good stock because of stock-based compensation, high valuation, and negative market sentiment. Thus, I believe that investors are better off staying on the sidelines until the share price drops to a more sensible valuation.
Good Company
Strong Fundamentals
I'm not trying to deny that CrowdStrike is a great company; CrowdStrike seems like the company is following Amazon's (AMZN) amazing business model. Amazon uses Amazon Prime to lure in more loyal users. With this service, users have access to fast and free shipping. The great thing about Amazon Prime is that Amazon also offers other add-on services like Amazon Music, Kindle, Amazon Live, Amazon echo, and Amazon Prime Videos. This ecosystem makes it very difficult for consumers to leave. In fact, consumers pay for more and more services over time. Similarly, CrowdStrike lures in its customers with its unmatched cybersecurity service. Then, CrowdStrike offers services like Falcon Prevent, Falcon Discover, Falcon X, Falcon Insight, and many more. This became more apparent as CrowdStrike bought a company called Humio to enter the data utilization market of log management. The business model that CrowdStrike has will naturally only increase the customer retention rate and the ARR (annually recurring revenue) of each customer. Not only this, CrowdStrike's potential goes beyond cybersecurity with its acquisition of Humio. Humio is a company that specializes in enterprise data management, which has a TAM of 136.4 billion dollars. Thus, I think there is no doubt that CrowdStrike is a great company.
(Please read this article from another Seeking Alpha author for a great detailed bullish thesis. I only briefly discussed CrowdStrike's business model to focus on why I think the company is too expensive.)
Bad Stock
Stock-Based Compensation
Before discussing the valuation, I would like to point to CrowdStrike's problem with its immense stock-based compensation. The immense and increasing stock-based compensation is not only diluting shares, it is the culprit behind the company's GAAP net- loss.
[Source-1]
As the picture above shows, stock-based compensation increased about 87.23% year over year while the total revenue increased 82%. This shows that the stock-based compensation is going out of control. Revenue grew slower than the company's stock-based compensation.
Furthermore, CrowdStrike's GAAP net income is negative because of the stock-based compensations.
[Source-1 -> Slide 11]
As you can clearly see, stock-based compensation is the culprit behind GAAP net loss and share dilution. CrowdStrike has been public since 2017. It is time for CrowdStrike to decrease stock-based compensation and shareholder dilution.
Valuation
Although I seriously think that stock-based compensation is a real problem, the main reason why I am currently bearish on CrowdStrike is because of its valuation. CrowdStrike is currently trading at 649 forward prices to earnings ratio with a 48 price to sales ratio, and the bullish market where every stock went up no matter what the valuation is over. We are finally starting to see a market where valuations play a key role in stock movements. For example, Advanced Micro Devices, AMD (AMD), reported the company's best earnings with a 93% y/y revenue increase, 94% y/y gross profit increase, and 189% y/y net income increase. Yet, the stock fell for a few days after the earnings report. This is another good example of a good company with a bad stock because it is obvious: valuations. At the time, AMD was trading at about a forward ratio of about 40, which is significantly lower than the valuation CrowdStrike is trading at. However, CrowdStrike has a worse balance sheet and growth rate. Furthermore, AMD was not the only company that fell after an amazing earnings report. Amazon and Apple (AAPL) also fell after an amazing earnings report. Thus, I believe, unless you strongly believe that CrowdStrike can beat earnings by miles, it is time to stay on the sidelines.
It is true that CrowdStrike can trade at a slightly higher valuation than big techs with its 80% margins and an amazing SaaS business model. However, this would only be true if the historical valuation is similar to today's valuation. After all, CrowdStrike has had amazing fundamentals since its IPO day in 2017.
[Chart created by author using YCharts]
The historical price to sales ratio shows that the last time the price to sales ratio reached today's levels, the company could not sustain the stock price. In other words, the stock price is growing faster than the company, which is leading to unsustainable prices due to high valuation.
Market Sentiment
The valuations compared to other companies are not the only problem, the current market sentiment revolving around inflation and tapering fear is creating more turmoil for high-growth tech stocks. High growth stocks have been mostly increasing beyond their true valuations because of almost unlimited liquidity for the past year. However, as the sign of a recovering economy, increasing inflation, and high asset prices show, some government officials like the Dallas Fed Chief Kaplan want to start the discussion about tapering, which can significantly limit the immense liquidity and bring up the bond prices. Also, the argument regarding whether inflation is really coming or not in the next few years is irrelevant because one thing is certain: temporary inflation is here. As Jerome Powell said, we will see high inflations for the next few months due to the base effect. So, even if the "real inflation" does not come, temporary inflation will pressure high growth tech stocks to decline. For the past few months, almost all commodities have been on the rise to rates higher or similar to pre-pandemic levels. This has created consumer price increases from companies like Procter & Gamble (PG) proving that some level of inflation is here. Also, the increasing supply chain bottle-neck due to the Covid-19 is increasing the inflationary pressure in the short term. Thus, companies like CrowdStrike will naturally be affected by fears surrounding the market.
Financials
[Source-1]
I said that investors should stay away until the valuations are more reasonable because the company has potential with a great balance sheet. Once the valuation trickles down, strong growth potential and the balance sheet will make an attractive investment. CrowdStrike has 1.918 billion dollars in cash, which equates to about 4.7% of the market cap in cash. The total asset stands at 2.73 billion dollars with about 1.86 billion dollars in liability. This creates about 68.13% in liability to asset ratio (L/S) or about 871 million dollars in stockholder equity. Also, debt is manageable at about 738 million dollars or net debt of about 1.18 billion dollars. I believe for a growth company with a positive non-GAAP net income, I think the current liability and cash position makes the balance sheet healthy.
Conclusion
I truly believe that CrowdStrike has immense potential in both the cybersecurity and data utilization market with its business model resembling Amazon prime. Over time, there is no doubt that CrowdStrike will exponentially increase its ARR and revenue; however, a great company does not always have a great stock. CrowdStrike is creating shareholder dilution with its immense stock-based compensation, which is growing as fast as the company's revenue. Also, extremely high valuations considering both its price to sales and forward price to earnings is concerning in a market situation where great earnings from high valuation companies result in the decline in the stock price. Current market sentiment revolving around inflation pressure is certainly not helping high growth stocks like CrowdStrike. Therefore, my advice to investors is to wait for a reasonable decline in valuation before buying more or starting a position in CrowdStrike.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (66)
1) CRWD went public in 2019, not 2017. That's a big difference and shows that some basic research wasn't done here.
2) Stock-based compensation increased 87% YOY due to one-time stock grants awarded to senior Management for finishing the year profitable (for the first time). That's a major milestone for the company and that's why the compensation saw a big increase, not simply for no reason. I'm not staying that it's not high compensation, or that the stock is a good one, but you need to look deeper than just the numbers... And get the basics right.
Yeah, don't listen to Cramer, listen to his ex-wife lol.Teranova or Brown maybe, not Finerman.
CRWD is not a speculative stock. Volatile yes. That provides frequent buying opportunities. Your stocks with lower valuations are likely your most speculative positions, as many of those have low valuations for very good reasons. Reasons that may not be apparent to you.
Early in my travels of managing my own investments, I used various tools to identify "undervalued" stocks. After all, buy low, sell high, right? Well, that's when I learned that "undervalued" was often "undervalued" for a reason.
Later I bought MSFT when they initiated a subscription based business and moved toward cloud. Initial investments were high and returns were low. So the share price was wildly overvalued. I loaded up at around $32. You can do the math. Similar story with AAPL. WHO has ever said AAPL is "undervalued". I invested around the time the watch came out, and they were moving to expand services. "Overvalued! " "The watch will be a bust!" "They're a hardware company." Well you know how that one turned out too.
Now CRWD. "Undervalued?" No one is saying that. But this is a company with great products, in a mission critical business, with extraordinary TAM, extraordinary growth. It may never seem "undervalued". But it will make a lot of money for shareholders. Can it go lower after dropping 25% in 2 months? Sure! What if it drops another 10% from here? What will that matter 10 years from now?
- you have no electricity for some days
- you have no clean water for a week
- all the traffic signals in your town are messed up
- the market can't process credit cards and tells you to use cash only (and there's lines at the ATMs)When that happens, stocks like CRWD will really pop. Sometimes up and to the right isn't a smooth path.
I own CRWD great product - I don’t disagree with the market sentiment— tech is out of favor. It does have a high valuation. I am curious what you think a fair evaluation really is?
This has been a volatile stock, which allowed me to make $45 per share in total option premiums.
I see the following potential catalysts to push the price higher.
1. Another high profile hack that would/could have been stopped if CRWD was in place.
2. Another key acquisition.
3. Investors wake up and realize that COVID impaired stocks are still impaired and that tech stocks are still making crazy $$$.
4. Next earnings report.
I don't see anything to logically push it much lower. While waiting for that elusive pullback, it could suddenly surge up. Then the familiar chorus "overvalued!".
CRWD is arguably the best cybersecurity company. Best product. Best growth. Probably the most important subsector within tech. Think about all that needs protection. Every device, app, program, email, access points, data, transactions, etc... Who needs it? Short answer - Every company, large or small, every government agency, anything that interacts in the digital world.
I'm not sure PE or PS is the best way to value CRWD. I do know those metrics caused me to miss out on AMZN. **
