CrowdStrike’s post-earnings stock drop is a buy. Here’s why sellers have it all wrong
CrowdStrike delivered a very good quarter after Tuesday’s closing bell, with management raising its full-year outlook on sales, operating income, and earnings. Nonetheless, shares of the cybersecurity firm were selling off as traders booked profits, perhaps because the current quarter profit guide came in a penny below expectations. The stock drop plays right into our hands. Revenue during CrowdStrike’s fiscal 2025 third quarter increased 29% year over year to $1.01 billion, beating the consensus estimate of $928 million, which was compiled by LSEG. It marks the first time quarterly revenue exceeded the $1 billion milestone. Adjusted earnings per share advanced 13% to 93 cents in the three months ended Oct. 31, ahead of EPS estimates of 81 cents, LSEG data showed. Annual recurring revenue jumped 27% to $4.02 billion, also ahead of the $4.01 billion estimate, according to FactSet. This is the first time ARR has surpassed $4 billion in a quarter. Remaining performance obligation surged 46% year-over-year to $5.4 billion, easily outpacing the $5.08 billion consensus estimate compiled by FactSet. CRWD YTD mountain CrowdStrike YTD CrowdStrike shares sank more than 5.5% in after-hours trading following the print. The move was right in line with Jim Cramer’s commentary on Sunday that investors should give thanks to shortsighted traders who provide opportunity after opportunity for those like us with a little patience and a willingness to do the homework to win over the long-term. Bottom line After going over the results, hearing from the team on the call, and seeing the stock reaction, we collectively have another reason to give thanks because you would have to be a shortsighted hot money trader to sell shares Tuesday evening. We are, therefore, reiterating our buy-equivalent 1 rating and increasing our price target to $400 per share from $350. CrowdStrike CEO George Kurtz noted on the earnings press release that the company has realized a gross retention rate of over 97%, an important factor given investor concerns about customers leaving the platform following a botched software update back in July that caused a global IT outage. Since the glitch, Kurtz and his team have put on a master class in addressing the company’s misstep — and as the fiscal third-quarter results show, it appears to be resonating with customers. On the post-earnings call, Kurtz said the company set a “new record of $1 million dollar plus transactions, closing more than 260 this quarter, equating to an average of four or more million dollar plus deals every business day.” The team highlighted strong “module adoption rates,” which CrowdStrike defines as the “total number of customers with five or more, six or more, seven or more, and eight or more modules, respectively, divided by the total number of subscription customers.” That excludes Falcon Go customers. Essentially, this metric is used to demonstrate that when customers come to CrowdStrike’s Falcon platform, they tend to sign up for more offerings and get more deeply embedded into the CrowdStrike ecosystem over time. By the end of the quarter, “module adoption rates grew to 66%, 47%, 31%, and 20%” respectively,” the company press release said. Falcon is CrowdStrike’s AI-native security platform, it operates entirely in the cloud, allowing for rapid updates, scalability, and ease of deployment. It stops breaches and saves time by speeding up threat protection and response time. It’s a platform that helps companies save costs by consolidating security solutions. The platform is made up of modules that each provide a specific security capability. Also serving to demonstrate customers’ commitment to the Falcon platform, Kurtz noted on the call that, “temporarily impacted by the incident,” dollar-based net retention was 115% in the quarter. CrowdStrike defines dollar-based net retention as “ARR from a set of subscription customers against the same metric for those subscription customers from the prior year.” In other words, it shows that existing customers are spending more, in this case, 15% on average, with CrowdStrike than they did a year ago. The team also called out the positive uptake of the Falcon Flex model announced last year at Fal.Con 2023. Falcon Flex subscription allows customers to swap one module for another as needed to achieve the lowest total cost of ownership while optimizing security. On the call, Kurtz said that, on average, CrowdStrike signed two Flex deals per day during the quarter “with the average Falcon Flex subscription being multiples larger than our typical contract value.” In fact, the Falcon Flex model now represents over $1.3 billion of total deal value, that’s up from the over $700 million figure announced at this year’s Fal.Con back in mid-September. This demonstrates how incredibly customer adoption is accelerating. The team said it signed over 150 Falcon Flex deals in its fiscal third quarter, with deal volume accelerating. Kurtz said, “Flex is already proving to be a rapid platform adoption accelerator across the customer base, giving us confidence in net new ARR acceleration in the back half of next year.” Kurtz said the company is also seeing its customer base broaden thanks to Flex. “We’ve talked about cybersecurity moving from the back room to the boardroom. With Flex, we’ve expanded our customer stakeholder audience to include the CFO. … Flex customers, on average have adopted more than nine modules, and we expect to see these numbers continue to rise faster.” He added, “With Flex, we have seen some customers more than double or even more than triple their model adoption. … Flex has allowed us to increase our share of wallet, consolidating multiple point product vendors. Looking at Q3, the average CrowdStrike customer spent hundreds of thousands, while the average Flex customer spent multi-millions.” It’s clear to us that the CrowdStrike Falcon platform is resonating with customers new and old. The threat landscape will only become more daunting as bad actors ramp up their efforts and leverage artificial intelligence to conduct increasingly complex attacks faster than ever before. In this day and age, cybersecurity is a must-have — not something that corporations can pull back on, even when the economic backdrop may weaken or when budgets come under pressure. It may not be cheap to continually invest in cybersecurity, but CrowdStrike is working diligently to offer customers the best value possible. A breach of a company’s data can prove far more costly, not only in financial terms but in reputation as well. Given the neverending threat of cyber attacks, and therefore neverending need for cybersecurity solutions, we think there is plenty of demand to go around, which is why we think there is also enough room in the portfolio for two names in the space, the other being Palo Alto Networks , which also reported a beat and raise that was met with selling pressure. Guidance For the fiscal 2025 fourth quarter, CrowdStrike management expects the following: Total revenue of $1.0287 billion to $1.0354 billion, which is slightly better than the $1.03 billion estimate, at the midpoint Non-GAAP earnings per share in the range of 84-cents to 86-cents, a penny below the 86-cent estimate at the midpoint (GAAP stands for generally accepted accounting principles) Non-GAAP operating income between $184 million and $189 million, slightly ahead of the 186 million consensus estimate, at the midpoint. Given the fourth quarter outlook, for full-year fiscal 2025, management expects: Total revenue of $3.92 billion to $3.93 billion, which is better than the $3.9 billion estimate, even on the low end. Non-GAAP earnings per share in the range of $3.74 to $3.76, well ahead of the $3.63 per share consensus estimate, even on the low end. Non-GAAP operating income between $804.4 million and $809.4 million, also well ahead of the $781 million estimate. Longer-term, the team also noted in the slide presentation that they see the company’s total addressable market (TAM) more than doubling from $116 billion in calendar year 2025 to $250 billion by calendar year 2029. That’s a whopping 115% increase. (Jim Cramer’s Charitable Trust is long CRWD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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CrowdStrike Holdings signage on the floor of the New York Stock Exchange on July 22, 2024.
Michael Nagle | Bloomberg | Getty Images
CrowdStrike delivered a very good quarter after Tuesday’s closing bell, with management raising its full-year outlook on sales, operating income, and earnings. Nonetheless, shares of the cybersecurity firm were selling off as traders booked profits, perhaps because the current quarter profit guide came in a penny below expectations. The stock drop plays right into our hands.