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Elevator Pitch
I continue to assign a Buy rating to CrowdStrike Holdings, Inc.’s (NASDAQ:CRWD) stock.
In my previous August 25, 2022 write-up for CRWD, I did a preview of CrowdStrike’s earnings for the second quarter of fiscal 2023 (YE January 31). I turn my attention to CrowdStrike’s share price underperformance in November with this latest update.
CrowdStrike’s stock crashed in November 2022 due to short-term macro-related challenges. Looking beyond near-term woes, I have a favorable view of CRWD’s outlook for the mid to long term. As such, the fall in CRWD’s share price in the previous month represents a good investment opportunity, which explains why CrowdStrike remains a Buy-rated name for me.
Why Did CrowdStrike Stock Drop In November?
CrowdStrike’s stock price dropped by -26.7% in November 2022, which is in sharp contrast with the S&P 500’s +5.8% rise in the same time frame.
It is relevant to understand why CRWD’s shares did poorly on both an absolute and relative basis in the prior month. In fact, CrowdStrike’s non-GAAP adjusted earnings per share grew by +35% YoY from $0.17 in Q3 FY 2022 to $0.40 for Q3 FY 2023, which beat the consensus bottom line forecast of $0.32 per share by +27%.
But some of CrowdStrike’s recent third quarter metrics left investors disappointed, which drove the fall in CRWD’s share price, as I will detail in the next section.
CRWD Stock Key Metrics
CRWD announced the company’s Q3 FY 2023 financial results with a press release issued on November 29, 2022 after trading hours.
Although CrowdStrike’s third quarter bottom line came in better than what the sell-side analysts were projecting, the company’s other key metrics fell short of the market’s expectations.
One key metric is CRWD’s growth in ARR or Annual Recurring Revenue. In the company’s Q3 FY 2023 10-Q filing, CrowdStrike defines ARR as “the annualized value of our customer subscription contracts.”
The YoY ARR growth rate for CrowdStrike slowed from +67% in the third quarter of fiscal 2022 and +59% for the second quarter of fiscal 2023 to +54% in the most recent quarter. This translated into a new ARR of $198 million for CRWD in Q3 FY 2023, which was below Wall Street analysts’ consensus third quarter net new ARR estimate of around $215 million as per S&P Capital IQ.
The other key metrics include topline expansion and new subscription clients.
CRWD’s revenue increase in YoY terms moderated from +63% for Q3 FY 2022 and +58% in Q2 FY 2023 to +53% for Q3 FY 2023. It is worthy of note that CrowdStrike’s Q3 FY 2023 top line beat the sell-side’s consensus estimate by just +1% based on S&P Capital IQ data. In the past 13 quarters between Q2 FY 2020 and Q2 FY 2023, CrowdStrike consistently delivered quarterly revenue beats of at least +3.6%.
Furthermore, CRWD’s net new subscription client additions amounting to 1,460 for Q3 FY 2023 was the weakest new customer growth that the company had achieved in the last eight quarters.
At the company’s Q3 FY 2023 earnings briefing, CRWD acknowledged that it observed “customers increasingly delay purchasing decisions” as a result of “macroeconomic headwinds.” As a result, CrowdStrike didn’t perform well on a number of key metrics in the recent quarter, and this led to CRWD’s stock price decline in November.
What Are The Price Targets?
In view of CrowdStrike’s stock price drop in November, it is worth spending time to analyze how Wall Street analysts have changed their assessments of CRWD’s valuations in the last month.
Based on the consensus sell-side target price taken from S&P Capital IQ, the mean analyst price target for CrowdStrike has been lowered by -22% from $238.26 as of October 31, 2022 to $184.54 now. The reduction in the consensus target price for CRWD is reasonable, considering its below-expectations Q3 2022 metrics like ARR and topline expansion as outlined in the previous section.
However, it is even more important that the current analysts’ consensus price target for CRWD still implies a substantial +49% upside as compared to the company’s last done share price of $124.00 as of December 2, 2022.
Can CRWD Recover?
Looking ahead, CRWD is in a good position to recover from its share price drop in November 2022, as the company is suffering from short-term headwinds which will eventually ease.
CrowdStrike’s forward-looking guidance suggests that the company’s medium-term prospects should still be pretty good. CRWD left its full-year fiscal 2023 revenue guidance unchanged, and it raised the mid-point of its FY 2023 normalized operating profit guidance by +8% from $325.15 million previously to $350.5 million now.
In addition, CrowdStrike is guiding for a reasonably decent “low 30s ending ARR growth rate and a subscription revenue growth rate in the low to mid-30s” in fiscal 2024 as per its Q3 FY 2023 investor briefing.
In my opinion, CRWD is justified in being confident about the company’s mid-term outlook as per its FY 2023 and FY 2024 guidance. This is because CrowdStrike is staying competitive, and it continues to make good progress relating to its cross-selling efforts.
CrowdStrike revealed at its most recent quarterly results briefing that its “win rates” are still elevated and even increasing for small-to-medium sized clients. Separately, the proportion of CRWD’s clients which adopted five or more modules grew from 55% for Q3 FY 2022 to 60% in Q3 FY 2023. Over the same period, the percentage of CrowdStrike’s customers utilizing six or more modules increased from 32% to 36%.
I move on to discussing CRWD’s prospects for the long run in the next section.
What Is The Long-Term Prediction?
I predict that CrowdStrike will continue to perform well in the long term.
CRWD boasts a long growth runway based on a comparison of its current revenue and its Total Addressable Market or TAM. At its earlier investor briefing on September 20, 2022, CrowdStrike revealed that it estimates its calendar year 2026 TAM to be around $158 billion. In comparison, CRWD’s current trailing twelve months’ revenue of $2,035 million is merely 1.3% of its projected TAM.
The weak economic environment might have been a negative for CrowdStrike in the recent third quarter, as mentioned in an earlier section of this article. But this might actually benefit CRWD in the long run, as more companies seek to accelerate the process of agent consolidation to cut back on expenses. Notably, CrowdStrike cited an example of one of its customers generating “cost savings of $2 million” as CRWD “displaced 9 (of its) agents” at its September 20, 2022 investor briefing.
The current sell-side analysts’ consensus financial figures for CRWD point to the company growing its top line and normalized EPS by impressive CAGRs of +33% and +46%, respectively, for the FY 2023-FY 2026 period. I think this is achievable, taking into account CrowdStrike’s massive TAM and the positive agent consolidation trend.
Is CRWD Stock A Buy, Sell, Or Hold?
CRWD’s stock still warrants a Buy rating. The substantial drop in CrowdStrike’s share price in November has priced in most of the short-term headwinds, while the company’s prospects in the intermediate to long term are unaffected.
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