New Potential Price Target for 'Best-in-Class' Cybersecurity Stock
We're going to be playing it cautiously.
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Leading cybersecurity platform provider CrowdStrike (CRWD) went to the tape with the firm's fiscal third quarter financial results on Tuesday evening.
For the three-month period ended October 31, CrowdStrike posted an adjusted EPS of $0.96 (GAAP EPS: -$0.14) on revenue of $1.234 billion. These top- and adjusted bottom-line numbers both beat Wall Street's expectations while the sales print was good enough for year-over-year growth of 21.8%.
The firm achieved record fiscal third quarter net new annual recurring revenue (ARR) of $265 million, good for annual growth of 73%. This put the firm's end of quarter total ARR at $4.92 billion, up 23% over the same point last year. The firm drove record third quarter operating and free cash flows. In addition, ARR from accounts that have adopted the firm's Falcon Flex subscription model have exceeded $1.35 billion. That was good for growth of more than 200%.
Operations
As mentioned above, revenue generation ramped 21.8% to $1.234 billion. Within that number, subscription services grew sales 21.4% to $1.169 billion while professional services drove revenue of $$65.5 million (+38.2%). Cost of revenue increased 20.7% to $307.8 million. This left a gross profit of $926.4 million (+22.7%) on a gross margin of 75.1% up from 74.7%.
Total operating expenses grew 22.8% to $995.9 million, leaving a GAAP operating income/loss of -$69.4 million. After accounting for interest, other income and expenses and taxes, the firm put a GAAP net income/loss of -$33.997 million to the tape. This works out to -$0.14 per fully diluted share, down from the year-ago print of -$0.07.
Once adjusted operating income landed at $264.6 million (+32.3%) as operating margin held firm at 21.4%. Sticking with the adjusted data, net income printed at $245.4 million (+28.5%). This works out to $0.96, up from the year-ago print of $0.76. The firm made a number of adjustments, the largest by far was made for the purpose of stock-based compensation. This number in terms of expense came to $293.3 million. When including the tax implications for this expense, the impact to EPS came to a whopping $1.14 per share.
Don't look at me. I think that if you have an operating expense that recurs every quarter, then it is ordinary and should not be adjusted for. Who am I? Just a guy who trades the markets and looks at charts, statements of income, cash flows and balance sheets. Maybe I'm the crazy one.
Guidance
CrowdStrike raised full year guidance and took the firm's forecasts above what Wall Street was looking for. For the current quarter, the firm now sees revenue of $1.29 billion to $1.3 billion, taking the midpoint above the Wall Street consensus of $1.29 billion. The firm also projects an adjusted FQ4 EPS of $1.09 to $1.11, bringing the bottom of the range above the $1.08 that Wall Street had in mind.
For the full year, CrowdStrike now projects total revenue of $4.7966 billion to $4.8066 billion. This is up from the previously issued range of $4.7495 billion to $4.8055 billion. The low end of the range is now above the $4.78 billion consensus view. As for full year adjusted EPS, the firm sees $3.70 to $3.72. This narrows the range and brings up the low end of the range substantially from the previously issued range of $3.60 to $3.72. Wall Street was looking for just $3.68.
Fundamentals
For the period reported, CrowdStrike generated operating cash flow of $397.541 billion. Out of that number came $83.395 million in traditional capex and $16.77 million in capitalized internal use software costs. There were also small items related to the purchase of deferred compensation investments and the sale of those investments that counted against free cash. This left free cash flow of $295.88 million (+28.3%). The firm does not return capital to shareholders.
Moving on to the balance sheet, the firm ended the period with a cash position of $4.801 billion and current assets of $6.519 billion. Current liabilities add up to $3.599 billion including deferred revenues of $2.851 billion. There is no short-term debt on the books. This puts the firm's headline current ratio at a healthy enough 1.81. Once adjusted for deferred revenues which are not true financial obligations (unless there is a failure to deliver), that ratio rises to a very muscular 8.72.
Total assets amount to $9.965 billion. Just 15% of that number is labeled as either "goodwill" or "other intangibles", which is fine. Total liabilities less equity comes to $5.906 billion. This Includes another $1.212 billion in deferred revenue and $745.099 million in long-term debt. The firm could take care of that debt load almost seven times over out of cash. This balance sheet is in better than excellent condition.
Opinion
This was a very solid quarter. The guidance is strong. Cash flows are robust. The balance sheet is pristine. CEO George Kurtz commented in the press release:
"CrowdStrike is the enabler of secure AI transformation with the right architecture, the right products, and the right execution. Q3 was one of our best quarters in company history."
CFO Burt Podbere added, "We delivered outstanding third quarter results, exceeding expectations across all guided metrics."
During the call, Kurtz stated, "AI is rapidly expanding the attack surface...Every single agent expands the attack surface, necessitating protection. CrowdStrike is both the armor and intelligence layer that keeps each agentic identity secure."
He then added, "CrowdStrike wins as the market's broadest and only single platform solution."
I am long the stock. The shares are trading lower on Wednesday morning. Let's take a look at the chart:
Readers will see the cup-with-handle pattern that I gave you early this past autumn. That pattern worked like a charm and gave us the run that peaked in early November. Now, a potential unfortunate pattern has appeared, at least for the bulls.
A nearly completed head-and-shoulders pattern of bearish reversal has developed with a downside pivot of $478. That would make, according to my math, for a suggestive target price in the mid $440s for the shorts, which is in the neighborhood of the all-important 200-day SMA.
As CRWD is a top-five holding of mine and I am still up 57% in the name, I am not yet ready to cut and run. I will, however, should I see that pattern completed and the downside pivot triggered. Of course, should that happen, I would expect my exit to be temporary. This is, in my opinion, the "best in class" cybersecurity name. For now, relative strength is soft and the daily MACD sings a song of short to medium-term woe.
For the stalwarts, the upside pivot becomes the 50-day SMA. Retaking that line would render the head-and-shoulders pattern mute and put my target price at $578. That, though, is not today's battle. Today's battle is to watch for a completion of the bearish pattern. I see no reason to lighten up until I see that action take place.
At the time of publication, Guilfoyle was long CRWD equity.
