Crowdstrike’s Growth Rates Are FALLING – Is It Time To Sell?
IMPORTANT: Please read the disclaimer before continuing.
In this post, I discuss Crowdstrike’s latest earnings – their rate definitely isn’t it used to be!
First, let me share my thoughts and sentiments just before Crowdstrike announced Q2 results.
As Crowdstrike began its mad growth trajectory, I wondered how the company would sustain this growth rate as its revenue base expanded.
To grow 70% on a revenue base of $100m, revenues need to be up $70m. To grow 70% on a $300m base, growth would need to be $210m.
So 70% growth for $300m would mean generating an additional $210m.
Crowdstrike’s revenue growth declined from 89% to 70%. It definitely doesn’t mean that they are not doing well. It’s just the math.
(RELATED POST: Four Lessons from Crowdstrike That Will Improve Your Portfolio)
It’s unrealistic to grow at 80 to 90% indefinitely. As you get bigger, it becomes harder to grow as much or as quickly.
When Crowdstrike announced Q2 earnings, I was happy revenue growth remained at 69 to 70%. This is a healthy growth rate. The company continues to execute well.
Crowdstrike’s revenue growth rate is driven by customer growth. Crowdstrike grew customers by 81%.
How do they grow so quickly? The earnings call gave us a good understanding on how efficient their sales team is.
Crowdstrike CEO and CFO shared that the company had landed enterprise deals over the weekend, including some in the seven-figure range.
So we know Crowdstrike’s product onboards new customers smoothly, which definitely addresses what customers want.
During the earnings call, ransomware was mentioned. As the term suggests, hackers attack computer servers and lock up data until a ransom is paid to unlock it.
To keep it simple, let’s visualise Crowdstrike as the good Navy ‘marines’, hackers as the bad-guy pirates, and the helpless fishermen captured and held hostage are companies’ important data.
In the earnings call, Crowdstrike shared that a client (Fortune 500 company) fell victim to ransomware, resulting in weeks of disruption, and financial impact estimated between $10 to $100m.
It’s not just money lost to ransomware – when a company is hacked, it faces functional and service downtime, takes a reputational hit, and has to deal with the consequences of security breaches of sensitive data (which needs to be reported if customer data was involved).
Naturally, a company would choose to allocate a portion of spending on protecting themselves. For a big company, this spending could be in the millions.
This leads to expansion of usage – the proportion of customers using four or Crowdstrike modules is increasing.
It used to be, when working with a new solution, clients would start off conservative, trying out one to two modules. Then, once assured of quality, they added would sign for additional modules. Today, it looks like clients are ‘loading up’ – they buy many more modules from the start.
Thanks to this, we can look forward to dollar-based net retention rate coming down over time.
A high dollar-based retention tells us existing clients are buying more modules. But since clients are already buying so many modules upfront, they may not buy new ones so quickly.
During the earnings call, an analyst asked if SentinelOne’s lower price offerings would affect customer acquisition.
Crowdstrike’s margin remains in the healthy high 70’s.
Of course, we must continue to watch this space. Never say never – a pricing war could well be in the cards. While Crowdstrike is currently ‘best in class’, only time will tell. We are still in the early stages and the cybersecurity evolves rapidly.
Remember this, fellow investors. All companies will do their best to sell themselves. We must study the numbers to determine for ourselves if their claims hold true.
As Crowdstrike hits a certain level of scale and operational leverage, we see a huge influx of cash flowing in.
This quarter, they had $73.6 m free cash flow, for a free cash flow margin of 21.8% (i.e., for every $1 of revenue, the company generates 21 cents of cash flow available to them re-invest into the business.
We see Crowdstrike’s fundamentals doing well.
What’s my take?
At $281, Crowdstrike is overvalued. Much of its growth has been priced in. I expect its stock price to fall a little.
For Crowdstrike’s stock price to continue soaring, the company would need to deliver revenue growth beyond 70%.
I’m on the fence for now. I have not added Crowdstrike to the 10K Portfolio.
Yes, Crowdstrike is a high-quality company. The only thing holding me back is the current high valuations.
Remember – Always Invest Safe! Study the facts and make your own decisions. Say no to lousy companies – only buy the best growth companies in the world.
PS: Want to see how Crowdstrike performed compared to the previous quarter (Q1)? Watch my video here or read my earlier post.
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