CrowdStrike's Decline Continues as Cybersecurity Faces AI Crossroads
Our outlook on the stock has become an exercise in risk management.
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Good thing we let out a few shares of CrowdStrike (CRWD) on the way down this year.
The idea when doing so was to buy them, or at least some of them, back on the post-earnings rebound. Those earnings were released on Tuesday evening. The stock is indeed up nicely from last week's lows but is a whole lot quieter on Wednesday morning than I expected. So, are my plans altered? Maybe. Let's get into it, shall we?
For the firm's fiscal fourth quarter, which ended January 31, "best in class" cloud-based cybersecurity software giant CrowdStrike posted an adjusted EPS of $1.12 (GAAP EPS: $0.15) on revenue of $1.305 billion. These top- and bottom-line results all beat Wall Street's expectations, while the sales print was good for year-over-year growth of 23.6%.
While the entire industry has existed recently under the threat of AI disruption, some argue that cybersecurity as a service will evolve with AI and become even more of a necessity for all government agencies, businesses and households like never before. On that note, the firm did, during the period, experience 24% growth in year-end annual recurring revenue (ARR) to reach $5.25 billion. The firm, during the quarter, also experienced 47% annual growth in net new ARR to reach $331 million.
Operations
As sales grew 23.6% to $1.305 billion, the cost of that revenue increased 16% to $315.913 million. That left a gross profit of $989.462 million (+25.9%). Total GAAP operating expenses grew 15.1% to $996.362 million, leaving a GAAP operating income/loss of -$6.9 million, up from the year-ago comp of -$79.305 million. Once adjusted, operating income increased 45% to $325.8 million as operating margin improved sharply from 21.2% to 25%. The largest adjustment made was easily made for the purpose of stock-based compensation, which was partially offset by adjustments for income taxes.
After accounting for interest, other income and expenses and taxes, GAAP net income attributable to shareholders hit the tape at $38.691 million, up from -$86.286 million for the same quarter one year ago. That works out to $0.15 per fully diluted share, up from -$0.35. After the above-mentioned adjustments, fully diluted EPS crossed at $1.12, up from $0.81.
Guidance
For the current quarter, CrowdStrike sees revenue of $1.36 billion to $1.364 billion versus expectations for $1.36 billion. This would lead to an adjusted EPS of $1.06 to $1.07. Wall Street was looking for about $1.07, so this is decent, but not really a beat.
For the full fiscal year, the firm is projecting revenue of $5.87 billion to $5.93 billion, taking the midpoint above the $5.87 billion that Wall Street had in mind. That would lead to an adjusted full year EPS of $4.78 to $4.90. With Wall Street looking for about $4.84, this is not really a beat either.
Fundamentals
For the quarter reported, CrowdStrike generated operating cash flow of $487.869 billion. Out of that number came $102.465 in traditional capex spending, $17.255 in capitalized internal use software expenses and $1.786 million in other assorted nonsense that I don't need to get into. That left free cash flow of $376.363 million. The firm does not return capital to shareholders.
Turning to the balance sheet, CrowdStrike ended the period with a cash position of $5.23 billion and current assets of $7.419 billion. Current liabilities add up to $4.184 billion, which includes no short-term debt, but deferred revenue of $3.421 billion. As deferred revenue is not a true financial liability unless unable to deliver, we adjust for that. At the headline, the firm's current ratio stands at a healthy 1.77. Once adjusted, that ratio rises to a beastly 9.72.
Total assets amount to $11.087 billion. Of that total, less than 14% can be considered intangible in nature. Total liabilities less equity comes to $6.614 billion. Long-term debt stands at $745.5 million, which is something the firm could handle out of pocket seven times over. The firm has $1.332 billion in non-current deferred revenue on the books as well. That means that of the firm's $6.614 billion in total liabilities, 71.9% is the kind that businesses crave. This balance sheet is a masterpiece.
Opinion
Cash flows are strong. The balance sheet is in excellent condition. Backorders are strong as well. That said, sales growth is not quite as robust as I would like for a stock trading at 81-times forward looking earnings. That's a lot. The industry is under external pressure and with a valuation like that, I think I need to see sales growth approaching 40%, not standing at less than 25%. Wall Street consensus is for 22% growth both for the current full year and for the next. That's not encouraging.
Readers will notice that, from mid-2024 through late 2025, the stock had built two rising-wedge patterns of bearish reversal that both worked well. Readers should also see the head-and-shoulders pattern of bearish reversal at the top of the chart that simply worked like a charm. The tea leaves were there to read.
However, there is no current pattern in place that could help determine what CRWD does now. The indicators may be improving. Relative strength is now moving back toward a neutral reading. The daily MACD is in tough shape, but at least the histogram of the nine-day EMA is back above the zero-bound and the 12-day EMA has crossed above the 26-day EMA, though both remain deep in negative territory.
It should be noted that the stock. last week, found support at the 61.8% Fibonacci retracement level of the July 2024 through November 2025 rally. I will not be adding unless I see the swing crowd act aggressively at the 21-day EMA. That could provide a boost that forces professional money to make a decision at the 50-day SMA. That said, I have no problem reducing further if I think a second test of that Fib. level is likely.
CRWD had been removed from my top-five holdings by weighting since the start of the new year and I will have an itchy trigger finger if I think I need to remove the name from my top 10.
At the time of publication, Guilfoyle was long CRWD equity.
