CrowdStrike (CRWD, Financial) released its third-quarter earnings results on Tuesday, and shares proceeded to slump by nearly 20% despite beating analysts' bottom line estimates by 5 cents per share. The consensus is that CrowdStrike's sell-off was triggered by its underwhelming fourth-quarter outlook, which was below analysts' estimates. The market might be searching for direction on this stock in the coming weeks; here are a few factors worth considering before making a judgement on CrowdStrike.
CrowdStrike reported that it produced $580.88 million in revenue during its third quarter, translating into a 52.8% year-over-year increase. Central to the company's quarterly success was its 54% increase in annual recurring revenue, suggesting its customer base is firmly committed to the brand.
The company added 1,460 net new subscribers in its third quarter, causing its cumulative subscriber base to reach 21,146, bringing year-over-year subscriber growth up to a whopping 44%.
Looking ahead, CrowdStrike believes its fourth-quarter revenue could settle between $619.1 to $628.2 million, well short of Wall Street's estimates of around $634.19 million.
Wall Street's outlook is divided, and fund managers are bearish
Wall Street analysts are dividend on CrowdStrike's prospects. Barclays (BCS) defended the company's outlook by stating, "The (post-earnings-results) reset will be painful, but we think (CrowdStrike) remains an investable name as the number 1 vendor in corporate endpoint, which is the top area of security investment according to our recent CIO survey."
On the other end of the pendulum is Morgan Stanley (MS, Financial), which released a bearish statement prior to CrowdStrike's third-quarter earnings release, citing cyclical features within the cybersecurity space. According to a recent note by the bank, "The biggest estimate cuts in were from smaller companies selling predominantly point products, in our view... This aligns with our general preference for leaning into consolidators, most of which are reporting off-calendar (namely) Palo Alto Networks (PANW, Financial) and CrowdStrike."
While Wall Street analysts were divided, active fund managers were mostly betting against CrowdStrike stock in its third quarter, with the likes of Catherine Wood (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Chase Coleman (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) all reducing their CrowdStrike exposure. While the number of guru buys and sells were mostly equal, the guru trading volume showed much more selling:
Following analyst and fund trades can give us valuable data points. However, investors should recognize that their decisions are made from a portfolio vantage point. Thus, holistic analysis is of the utmost importance.
CrowdStrike is an early-stage growth company, meaning its key influencing variables differ significantly from more mature stocks. For example, its investor base will typically rely on growth metrics over valuation multiples.
GuruFocus' data suggests CrowdStrike's growth remains intact and stacks up favorably versus its cyclical averages. For example, the company's three-year Ebitda growth rate of 26.1% indicates significant growth. Assessing technology companies' income statements often requires analysts to back out depreciation and amortization as expensing of the line items can be volatile. In addition, early-stage companies' capital structures have yet to establish consistency. Thus, CrowsStrike's magnificent Ebitda growth speaks volumes.
On top of its stellar Ebitda growth, CrowdStrike's gross margin of 73.74% provides encouragement as it implies potential economies of scale, which could grant the company tremendous bargaining power over its suppliers and pricing power within its industry. As previously mentioned, CrowdStrike is in the early stage of its business cycle; therefore, bottom-line profitability shouldn't be too much of a concern.
Despite the company's impressive qualities, systemic risk could alter the stock's near-term prospects. Although you can diversify idiosyncratic risk out of an investment portfolio, all financial assets are influenced by systemic risk, meaning factors such as economic outlook, market volatility and sector rotation have a bearing on stocks regardless of the microeconomic prowess they exhibit.
The volatility index, also known as the VIX, provides a parsimonious explanation of investor risk appetite due to its inverse relationship. The VIX usually expands whenever interest rates rise due to the narrative that higher risk-free rates attach excess volatility to the market. It's likely that the inconsistent macroeconomic policies that we've become accustomed to in 2022 will persist, preventing the VIX from receding to pre-pandemic levels. This adds further pressure to growth stocks such as CrowdStrike, which are risk-on.
Furthermore, CrowdStrike could face intensifying competition in the cybersecurity space, which is growing at a compound annual growth rate of 10.92%. Therefore, the stock market could soon price industry saturation, in turn causing headwinds for CrowdStrike.
CrowdStike's post-earnings slump has caused waves among investors. Although the stock exhibits attractive growth metrics for the long-term, Wall Street analysts and hedge fund managers remain bearish on the name in the current risk-off environment. In addition, systemic risk could prevail in the near term, so investors may have a while yet to further analyze the stock before the market begins turning in its favor again.