CrowdStrike: A Buy-and-Hold Stock Despite Near-Term Risks

CrowdStrike’s (NASDAQ: CRWD) global service outage remains a risk for the company, but its operational quality and business utility supersede the risk. The company is a great go-to platform for businesses seeking to consolidate and simplify their cybersecurity needs. Cyber attacks are growing at a near-30% pace in 2024, with the average number of attacks per business running above 1,500 per week. 

That’s nearly 2,000 cyber security threats per week, more than 100,000 per year, a mind-boggling statistic that ensures CrowdStrike and other cyber security companies can continue to grow. Regarding CrowdStrike’s effectiveness, it recently set a new standard for threat detection speed and is a leading vendor, according to The Forrester Wave: Cybersecurity Incident Response Services. 

CrowdStrike Outperforms but Issues Cautious Guidance 

CrowdStrike had a solid Q2 and provided decent guidance despite the impact of its outage. The $963.9 million in net revenue is up nearly 32% YoY on the increase in clients and deepening penetration of services, which is driving margin strength. Subscriptions, the largest portion of revenue, grew by 33% to account for 95% of the revenue and significantly improved the margin. ARR, or annual recurring revenue, a detail lending clarity to the outlook, grew by 32% with 10% of the business net-new for the quarter. Adoption rates, an indicator of penetration, came in at 65%, 45%, and 29% for businesses using five or more, six or more, and seven or more of CrowdStrikes’ cybersecurity options. 

The margin news is impressive. CrowdStrike widened its GAAP and adjusted margin at the gross and operating levels on internal efficiencies, penetration of services, and sales leverage, which is growing. The takeaway is that margin and income came in at record levels, with the adjusted gross margin near 81% and adjusted net income and free cash flow up 45% YoY. Earnings, impacted by the dilutive impact of share-based compensation, grew by 40% and outpaced the consensus by 720 bps, more than 10x the strength shown on the top line. 

Guidance is a concern but mitigated by company efforts to mitigate the impact of its outage on clients. Those efforts include incentives, payment extensions, and term changes that will impact the near-term results but not the long-term outlook. The takeaway is that guidance is below the consensus estimates but still calls for growth and is likely cautious, given the trends. Palo Alto Networks’ shift to platformization proves that single-source cybersecurity solutions are critical to the industry, and CrowdStrike is a leading vendor, if not the leader. 

CrowdStrike: Cash Flow and Balance Sheet Point to Higher Share Prices 

CrowdStrike experienced a massive outage, impacting the outlook but not the company’s health. The balance sheet highlights a fortress company with cash and assets rising, debt and liabilities flat, and equity up nearly 10%. Leverage remains low, with total liability at roughly 1.5x equity and long-term debt of about 0.2x cash. CrowdStrike results may not be up to par for the next quarter or two but are sufficient to sustain balance sheet health while reinvesting until the outage impact dissipates.

Analysts Adjust Targets: Show High Conviction in 20% Upside Forecast

The analysts' activity was mixed following the release, but the takeaway was bullish. While 59% of the 17 revisions tracked by MarketBeat include lowered price targets, the range of targets is narrowing to a level above the current consensus. The broad consensus of targets is near $325, down due to the outage, but implies a 20% upside for this market. The consensus of the fresh targets, those released following the earnings report, is closer to $365 and adds another 15% of upside to the forecast, putting the market near an all-time high. The price action following the release is tepid, but support remains strong at the $260 level, a likely launch pad to higher price points. 

The article "CrowdStrike: A Buy-and-Hold Stock Despite Near-Term Risks" first appeared on MarketBeat.