Where I'll Revisit CrowdStrike as Wall Street Sees Red Flag
I could look to buy back some sold shares of the cybersecurity firm even though Wall Street is taking its recent miss very hard.
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Cybersecurity "best-in-class" operation CrowdStrike Holdings CRWD went to the tape with the firm's fiscal fourth quarter financial results on Tuesday evening.
The results were solid. The guidance was somewhat or maybe more than somewhat disappointing. The stock is off significantly overnight. Readers may recall that I sold a chunk of my long position going into these numbers, which was wise. Readers may also recall that I left enough of a chunk of CRWD in place on my portfolio. That doesn't look nearly as wise this morning. Let's dig in.
For the period ended January 31, 2024, CrowdStrike posted an adjusted EPS of $1.03 on revenue of $1.059 billion. The top-line print was good for year-over-year sales growth of 25.4%. This was a deceleration in the rate of sales growth that was not unexpected. Both the top-line and adjusted bottom-line numbers did beat Wall Street. Annual recurring revenue grew 23% to $4.24 billion, of which $224.3 million was net new AAR added during the quarter. Subscription gross margin printed at 77%, down from 78% from the year-ago period. Adjusted subscription gross margin landed at 80%, which was flat from that year back comparison.
CrowdStrike Operations
Of the $1.059 billion in revenue generated, $1.008 billion (+33%) was driven by subscription, while just $50.222 million (+1.7%) was driven by professional services. The cost of that revenue came to $273.99 billion (+31.4%), leaving a gross profit of $784.548 million (+23.2%). That took the firm's overall GAAP gross margin from 75.3% to 74.1%.
Total operating expenses increased 43.3% to $869.849 million, leaving a GAAP operating income/loss of -$85.301 million, down from the year-ago comp of $29.671 million. Once adjusted, operating income printed at $217.25 million (+1.9%) as the firm's adjusted operating margin dropped from 25% to 21%. By far, the largest adjustment made was for the purpose of stock based compensation expense, which came to $1.08 per share.
After accounting for interest, other income and expenses and taxes, GAAP net income/loss attributable to CrowdStrike shareholders dropped from last year's $53.699 million to -$92.282 million. This worked out to a GAAP EPS of -$0.37 versus the year-ago comp of $0.22. Once adjusted, net income grew 10.4% to $260.949 million and EPS grew from $0.95 to $1.03.
CrowdStrike Stock Fundamentals
For the full year, CrowdStrike generated operating cash flow of $1.382 billion (+18.5%). Out of that number, the firm spent $254.852 million on traditional capex and $58.969 million on capitalized internal use software. That left free cash flow of $1.068 billion. For the quarter, free cash flow dropped 15.3% to $239.8 million. The firm does not return capital to shareholders.
Turning to the balance sheet, CrowdStrike ended the period with a cash position of $4.323 billion and current assets of $6.113 billion. Current liabilities add up to $3.461 billion, but $2.733 billion of that was labeled as "deferred revenue" which is not a true financial liability. The firm's headline current ratio is a strong enough 1.77, but once adjusted for those deferred revenues, that ratio rises to an incredibly robust 8.4.
Total assets amount to $8.701 billion. This includes goodwill and other intangibles of $1.046 billion. At 12% of total assets, this is not an issue. Total liabilities less equity comes to $5.383 billion. Of that, $743.983 million is in long-term debt. The firm can pay this off several times over out of pocket. Another $995.672 million is in non-current deferred revenue, so 69.3% of the firm's total liabilities are in the form of goods or more likely services owed. This is a strong balance sheet and that is a good position to be in.
CrowdStrike Guidance
This is where CrowdStrike got caught up on Tuesday night. For the current quarter, the firm is looking for total revenue of $1.100.6 billion to $1.106.4 billion. Wall Street was looking for a rough $1.1 billion, so this is a very slight beat. Adjusted EPS is seen at $0.64 to $0.66. This, unfortunately, was well below the $0.95 that had been consensus. Wall Street took this miss very hard.
For the full year, the firm projected total revenue of $4.7435 billion to $4.8055 billion. At the midpoint, this was slightly below the $4.79B that Wall Street had in mind. Adjusted EPS is seen at $3.33 to $3.45. Again, this was well below the $3.85 that had been a loose consensus, but the range of expectations was wide. The very low end of that range had been for $3.38, which was close to the midpoint of the guidance provided.
Why the huge misses on quarterly and annual adjusted profitability? The firm adjusted its outlook for the long-term tax rate. The adjustment took nearly a full dollar off of the firm's full-year adjusted EPS guidance. Tack that dollar back on and you have a healthy beat. That doesn't change the fact that the firm will be paying more tax than previously thought.
Wall Street on CrowdStrike
Wall Street does not seem nearly as fazed by this expected miss in adjusted profitability as investors do. Since these earnings were released last night, I have come across 26 highly-rated (four-plus stars at TipRanks) with something to say on CRWD. Of the 26, there are 23 "buy" or buy-equivalent ratings and three "hold" or hold-equivalent ratings. One of the "buys" and one of the "holds" did not set target prices, so we are working with 24 of those.
After allowing for changes, the average target price across these 24 analysts is $420.08 with a high of $475 (Saket Kalia of Barclays) and a low of $347 (Stephen Bersey of HSBC). Once omitting those two as possible outliers, the average target across the remaining 22 analysts rises slightly to $420.91.
My Thoughts on CrowdStrike Stock
Yes, the guidance bothers me. I already took my pound of flesh. I don't think I need to exit the stock completely. This is still a top-five holding of mine, it is probably just correctly sized now. Will I add any of the sold shares back on? Probably. When either the technical set-up appears to be more constructive or if the outlook for profitability were to improve.
My thought is this: The trend apparent since early this past August just broke on Wednesday morning. There is a newly-created unfilled gap that would need a $371 tick to fill.
However, I would not be surprised to see the stock test its 200-day SMA before making any serious attempt at putting together a recovery. That line is at $333 right now. I am likely to use some of the cash created and add to my long position in high-end, but much smaller competitor SentinelOne S, as that stock has also been under pressure and that firm reports in a week and may not have the same tax issues as CrowdStrike.
At the time of publication, Guilfoyle was long CRWD and S equity.
