CrowdStrike (CRWD, Financial) is a cybersecurity company that provides businesses and organizations with endpoint security, threat intelligence and incident response services. The company went public in June 2019 and quickly became one of the best-performing stocks on the market. CrowdStrike's stock has more than tripled in value since its IPO, and analysts believe the company has much more room to grow. CrowdStrike is well-positioned to benefit from the growing global cloud cybersecurity market, which is a $2 trillion market opportunity according to estimates from McKinsey & Company.
However, there is some near-term weakness investors will need to contend with. The stock market has turned against growth stocks, and the company's guidance for the fourth quarter of fiscal 2024 is muted. Under these circumstances, the stock is not likely to do well in the near-term. However, investors who are bullish on the stock will see this as a momentary blip. Cyber attacks are a huge and growing threat, and the sophistication of these attacks will only increase with time. Companies like CrowdStrike will be immensely important in this situation moving forward.
CrowdStrike is galloping along at a brisk pace
In the third quarter of fiscal 2023, CrowdStrike seemed to have gained momentum. The revenue generated in the quarter was $580.882 million with a GAAP loss per share of $0.24 and non-GAAP earnings per share of $0.40. Year-over-year, revenue jumped by 53%, which was no mean feat under current circumstances. Subscriptions are the company's biggest revenue driver, as the segment contributed $547.376 million to sales and was up by more than 53.3% year-over-year. The revenue generated by professional services was $33.506 million and rose by approximately 45.6%.
Annual recurring revenue, an important metric for Software as a Service (SaaS) companies like CrowdStrike, was $2.34 billion, up by 54% year-over-year. However, the third quarter of fiscal 2023 contributed just $198.1 million to the trailing 12-month recurring revenue. Not only was this below estimates, but the meager 17% year-over-year increase in recurring revenue was far below the 45% year-over-year growth seen last quarter. According to the company, its small non-enterprise business clients took longer to make purchasing decisions, which resulted in a decrease of $15 million from the second quarter of fiscal 2023. In addition, CrowdStrike’s larger clients, owing to macroeconomic conditions, opted for multiphase subscriptions with delayed start dates. This resulted in $10 million of recurring revenue being pushed to future quarters. Moreover, less than $1 million was contributed to the recurring revenue because of the acquisition of Reposify.
The figure for net new subscription customers was 21,146, representing growth of 44%. The subscription clients that have adopted five or more modules were 60% of the subscriber base, while 36% of clients subscribed for six or more modules and 21% went for the sevenor more modules category. The growth is due to the company’s firm "land and expand" strategy and cross-selling of its modules.
Why are investors peeved post-earnings?
The company’s non-GAAP operating expense was $348.6 million in the quarter, about 60% of the revenue. As for its non-cash expenses, the stock-based compensation expense was $140.113 million. By the end of the third quarter, the free cash flow rose by 41% and was $174.077 million, which was 30% of the revenue.
In other words, CrowdStrike’s equity offerings to its executives can largely be blamed for the company not being as profitable as it can be. Its stock-based compensation was around 24% of the total revenue in the third quarter. In the first nine months of fiscal 2023, stock-based compensation grew by 72% and ate away a quarter of the total revenue.
In addition, investors are worried about the decrease in growth seen in revenue, subscription customers and net new annual recurring revenue.
On top of that, the guidance given by the company is cooling investor sentiment. For the fourth quarter of fiscal 2023, the revenue guidance is between $619.1 million to $628.2 million, which is below analyst estimates. The company mentioned that it sees around a 10% sequental decrease in net new annual recurring revenue in the fourth quarter compared to the third quarter. Even worse, the company estimates this trend will continue in fiscal year 2024 with a 10% decline in net new annual recurring revenue.
An industry that keeps on growing
While CrowdStrike may be struggling in the near-term, the company is firmly established in an industry that is projected to see immense growth in the future.
Fortune Business Insights projects that the global cyber security market will predicted to grow to $376.32 billion by 2029, up from $155.83 billion in 2022, for a compound annual growth rate of 13.4%. From 2015 to 2025, the cost of cyberattacks is expected to rise by over 300%. This means by 2025, the average annual loss due to cybercrime will be $10.5 trillion, from just $3 trillion in 2015, according to the 2022 Cybersecurity Almanac.
Of course, this means that some of the most experienced cybersecurity companies, such as CrowdStrike, have solid growth prospects ahead of them. There will be multiple opportunities for investors to re-assess the stock over the upcoming decade.
Despite short-term headwinds, the strengths of CrowdStrike's business model and industry growth prospects remain intact. While the guidance for fiscal 2024 might not be as upbeat as investors may want it to be, the long-term outlook still looks promising in my view.
