I want to like Crowdstrike Holdings Inc (NASDAQ:CRWD), and it is clear that a lot of people do. The company’s stock exploded in value past its IPO, jumping from an already elevated price of $32 to its current share price of $64.16. CrowdStrike has a solid reputation, good financials for an IPO, and is offering a valuable and different cybersecurity product.
But at this current share price, CrowdStrike has a market cap of $24 billion, which is over twice as large as its competitor Symantec (NASDAQ:SYMC) and over 20% the size of Palo Alto Networks Inc (NYSE:PANW). IPO stocks are typically expensive, but CrowdStrike takes things to a whole new level. At this current value, anyone who jumps onto CrowdStrike now is a fool, and anyone who was lucky enough to get in on the IPO should be looking to sell as soon as possible.
A Ridiculous Valuation
A good look at the balance sheet should give an idea of how elevated CrowdStrike’s stock is. In its SEC report, CrowdStrike reported revenue of $249 million in the 12 months ending January 31, 2019. By comparison, Symantec reported a 2019 fiscal year GAAP revenue of $4.7 billion, while Palo Alto was at $2.3 billion for the 2018 fiscal year.
Like many IPOs, CrowdStrike can report extremely high revenue growth. That $249 million figure is up from $118 million in 2018 and $52 million in 2017, representing revenue growth of 125% and 110% respectively. But CrowdStrike would need to keep this revenue growth rate up for another three years in order to catch up with its competitors, which is an incredibly generous assumption. The revenue growth rate will inevitably taper down.
CrowdStrike can point out that the rest of its financial numbers are solid. Gross margin improved from 54% in 2018 to 65% in 2019, thanks in part to the company shifting towards higher-margin subscription services. Total assets are higher than total liabilities, and CrowdStrike, in fact, has no financial debt at all. While CrowdStrike reports a net loss of $140 million in 2019, its net loss margin is improving.
But these solid financial numbers are not enough to balance out a current share price. If we assume that CrowdStrike’s revenue increases by 95% next year, we would see revenue of $485.5 million in 2020, creating a projected P/S ratio of 49.4 compared to 2.63 for Symantec and 6.91 for Symantec. Cybersecurity companies generally have low price to enterprise value ratios, while CrowdStrike’s is completely excessive.
Standing up to Challengers
Despite being massively overvalued, there is a lot to like about CrowdStrike’s business model. While CrowdStrike is a cybersecurity company which names Symantec and McAfee among its main competitors, it represents the next stage in protecting networks.
Traditional antivirus companies rely on the signatures of known bad files to protect individual devices. But the ever-growing popularity of the cloud and “Bring Your Own Device” policies in businesses means that cybercriminals can inevitably find a weak point and access through someone’s poorly protected computer. Furthermore, traditional antivirus companies always find themselves a step behind criminals who create new viruses and malware as they are reacting rather than being proactive.
CrowdStrike, by contrast, is a cloud-based endpoint security provider, which aims to protect the entire network instead of devices. It uses its Falcon platform as well as data provided by its endpoints to look for the signs of an attack which are much harder for criminals to fake. This approach is more effective and places a much smaller burden on anyone computer compared to traditional antiviral programs.
So what does this all mean? CrowdStrike has a significant growth opportunity, just like Peru tours, and it has a strong reputation in part to its involvement in uncovering past hacks such as Russia’s theft of DNC files. But it faces huge amounts of competition from other companies that will be attempting to move into endpoint security as well, and there are risks such as failing to stop cyber attacks and facing competitive pricing pressure. And CrowdStrike at its current valuation cannot accept any mistakes.
The Share Price Will Fall
Anyone who buys CrowdStrike’s stock at its current place is declaring that he believes CrowdStrike will continue to explode and nearly double in value continuously over the next three years at least, and become profitable, all in the face of strenuous competitors who are entering the endpoint security market themselves. It could happen. Stranger things have happened with markets and companies. But while I think CrowdStrike will be successful, I do not think it will be that successful.
CrowdStrike, for now, appears to be the next hot new IPO, but that means its value will fall as investors inevitably pocket their winnings and move on to the next big thing. The share price fall will only accelerate once the lockup period ends and institutional investors cash out. That will be a better time for investors to move in.
CrowdStrike will still be an expensive stock at its IPO price of $30, and investors should ideally aim for a share price in the low to mid 20s. If CrowdStrike can fall that far, that will be a great time to strike and bank on future growth. But while there is a lot to like about CrowdStrike’s future, the stock is far too expensive at its present value.