Debt Deal Done, Fed Set to Skip, How I'm Playing CrowdStrike After Its Beatdown

See you in 18 months.

On Wednesday evening, the House of Representatives easily passed the bi-partisan bill to suspend the federal debt ceiling until January 1, 2025. The bill, reliant upon support from both major political parties, gained passage with a tally of 314 "yea" votes versus 117 "nay" votes. In the end, 71 of 222 Republicans and 46 of 213 Democrats voted against the bill either on grounds that it did not actually cut spending, or because it does actually decelerate the already unsustainable trajectory of growth in federal spending.

That said, the center of both parties easily outweighed the extremes and was able to get the awkwardly named "Fiscal Responsibility Act" over to the Senate where despite the open objections of Senator Bernie Sanders (VT-Ind) because there are no proposed tax increases, passage is expected.

Senate Majority Leader Chuck Schumer (NY-D) stated "I cannot stress enough that we have no margin for error. Either we proceed quickly and send this bi-partisan agreement to the president's desk, or the federal government will default for the first time ever."

In response, Senate Minority Leader Mitch McConnell (KY-R) said that he would be "proud to support" this bill. Any hiccups at this point would negatively shock financial markets. That default now looms as soon as June 5 should the Senate not pass this bill.

Fed Teasers?

The Fed spent Wednesday setting up a "skip" if not a "pause" scenario in its aggressive trajectory of increases in short-term interest rates over the past 10 meetings covering almost a year and a half.

Fed Governor Philip Jefferson, who has been tapped by President Biden to serve as the Fed's next Vice Chair, spoke cautiously from Washington. "A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle." Jefferson added: "Indeed, skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming."

In addition, Philadelphia Fed President Patrick Harker, who does vote on policy this year, said, "I think we can take a bit of a skip for a meeting and frankly, if we're going to go into a period where we need to do more tightening, we can do that every other meeting."

Despite the sheer numbers of hawkish-sounding Fed officials that have opined of late on policy, including the nearly always hawkish Cleveland Fed President Lorretta Mester, who does not vote this year, these two influential voters appear to be lining up behind Fed Chair Jerome Powell, who in mid-May first suggested the idea of skipping meetings as a means toward slowing the upward trajectory of policy as the FOMC nears what would be the terminal Fed Funds Rate. Importantly, this signaling is taking place ahead of the Fed's blackout period (starting this weekend) before its scheduled June 14 policy decision.

All this talk of skipping a rate hike here or there has taken Fed Futures trading in Chicago from a majority probability for a 25 basis point rate hike on June 14 to a 67% likelihood being priced in that no rate hike takes place that day. These markets are now pricing in a 65% probability that the FOMC implements that 25 basis point rate hike on July 26, and that the terminal rate will still land in a range spanning from 5.25% to 5.5%. Oh, Patrick Harker speaks again today.

Equities

U.S. stocks mostly moved lower on elevated trading volume on Wednesday, which was the final trading day of May. Equities did rally off of their lows for the session as algorithms that control price discovery found favor in the more dovish-sounding Fed talk and turned attention away from the House of Representatives as passage of the suspension of the debt ceiling became more and more likely.

The macro was mixed on Wednesday, as the Chicago PMI for May reflected highly recessionary business conditions that were not really present in the Fed's Beige Book. The Beige Book did show some slight deterioration in growth expectations, but little change in present conditions from the recent past. In addition, though dated (April), the JOLTS data printed stronger than expected both for job openings and for job quits.

On the last day of May, just about every equity index that I follow, save the Dow Utilities, gave up some ground. The S&P 500 slid 0.61% as the Nasdaq Composite surrendered a similar-looking 0.63%. Smaller-caps were hit harder as the Russell 2000 lost 1% in value while the S&P 600 gave up 1.31%. The Dow Transports were slapped around to the tune of 1.83%.

After taking a day off, the trifurcated way that programmed algorithmic trading slices up performance by sector, returned. Four of the 11 S&P sector SPDR ETFs showed gains on Wednesday. Led by the Utilities (XLU) , all four were what traders refer to as "defensive" in nature. Energy (XLE) led to the downside (-1.76%) as all five cyclicals took places seven through eleven, and the two "growth" sectors finished in places five and six. The Technology sector (XLK) closed down 0.83% for the day, but up 8.92% for the month, as profit taking hit the Philadelphia Semiconductor Index (-2.71%) on Wednesday, but gained 15.3% for the month.

Looking at breadth may not be reflective of really anything as there was an MSCI rebalancing on Wednesday's closing bell in addition to end of month capital flows. Losers beat winners by roughly 4 to 3 at both of New York's primary exchanges. Advancing volume took a 35% share of composite NYSE-listed trade and a 46.4% share of Nasdaq-listed trade. That said, aggregate trading volume ballooned by 41.4% on a day-over-day basis for NYSE-domiciled names and a mere 21.9% day over day for names calling the Nasdaq home.

CrowdStrike Beatdown

Sarge-name CrowdStrike Holdings (CRWD) released its fiscal first-quarter results on Wednesday afternoon. The results are strong. The stock's reaction (-10% overnight) has not been.

For the three-month period ended April 30, CrowdStrike posted adjusted EPS of $0.57 (GAAP EPS: $0.00) on revenue of $692.58M. These top and adjusted bottom-line results both beat Wall Street's expectations, while that revenue print was good for year-over-year growth of 42%. While 42% growth is still impressive by any means, this is a fifth consecutive quarter of decelerating growth, which, coupled with a forward-looking P/E ratio of 69 times (which is in line with the cybersecurity industry), could be a reason for some overnight profit-taking. The majority of the adjustment ($0.54 worth) was made for the expense of stock-based compensation.

For the quarter, CrowdStrike achieved record revenue, record GAAP and adjusted earnings, record operating cash flow and record free cash flow. Ending ARR (annual recurring revenue) grew 42%, reaching $2.73B, after adding $174M in net new ARR. GAAP subscription gross margin of 78% and adjusted gross margin of 80% were both records. Module adoption rates were 62%, 40%, and 23% for customers using 5+, 6+ and 7+ modules at quarter's end.

Fundamentals

CrowdStrike generated operating cash flow of $300.9M for the period. Out of this came purchases of $62.3M in property and equipment and another $10.9M in capitalized software and website development costs. This left the company with free cash flow of $227.4M. CrowdStrike does not return capital to shareholders.

Turning to the balance sheet, the company ended the quarter with a cash position of $2.93B and current assets of $3.709B. Current liabilities add up to $2.08B, leaving CrowdStrike with a current ratio of 1.78, which looks quite healthy. That said, those current liabilities are primarily composed of $1.788B in deferred revenue, which is not a financial liability at all, but one of services or labor owed. Hence, the company's current situation is actually much, much stronger than reflected by any such ratio.

Total assets amount to $5.138B, including $514M in goodwill and other intangible assets. At 10% of total assets, I do not see this as a problem of any kind. Total liabilities less equity comes to $3.503B, including $741.4M in long-term debt and another $615.5M in deferred revenue that is not considered current. While 68.6% of all liabilities are actually deferred revenue, which reflects strength, the company could pay off its debt-load nearly four times over out of pocket if need be.

This balance sheet is aces.

Wall Street

I have only seen five sell-side analysts rated at four stars or better, opine on CRWD since these earnings were released last night. All five have placed either "buy" or buy-equivalent ratings on the stock.

The average price target across the five is $187 with a high of $235 (Trevor J. Walsh of JMP Securities) and a low of $162 (Saket Kalia of Barclays).

Looking Ahead

For the current quarter, Crowdstrike sees revenue of $717.2M to $727.4M, taking the midpoint above the $718.6M that Wall Street had in mind, as adjusted EPS is seen at $0.54 to $0.57 versus consensus view of $0.54. For the full year, Crowdstrike expects to drive revenue of $3.0005B to $3.0367B. That takes the low end of the range above the $3B Wall Street consensus. Full-year adjusted EPS is now forecast at $2.32 to $2.43, which again takes the low end of the range above consensus ($2.31).

The company also announced that it had been granted an Impact Level 5 Provisional Authorization by the U.S. Department of Defense. This is the highest unclassified level of authorization and permits the DoD, other agencies and the intelligence community to deploy CrowdStrike to aid in competing zero-trust security architectures across this space. The DoD expects to have that done by 2027.

My Thoughts

Solid quarter. Excellent guidance. Nice cash flows. Very nice balance sheet. DoD authorization. Sales growth is still intact in a tougher environment. Valuation is the only thing I see that I don't necessarily like.

Not to make light of this item, as it could be what brings this industry back to earth. So, I ask myself if there is one place that I would allow for what I would otherwise see as absurd valuations. There are actually two. Anyone who sells what buyers need to integrate AI into their own offerings and those engaged in cybersecurity.

There will be winners and losers. I think CrowdStrike is a winner, as I do not see how corporate America can take its chances in this space. There is just too much at stake to not protect oneself from bad actors.

My net basis in this name is currently $101.54, so I am not going to go red on this position, at least not today.

That said, I see the defense of the $140 level as crucial this morning. That level held as resistance from March into April and held through several tests. This morning, that level will likely be tested from above.

The level holds? So do I. The level cracks? So do I.

Should the stock lose that level and not quickly retake it, I will move to take some profits in this name in order to protect myself. Do I add? Not up here.

Economics (All Times Eastern)

08:15 - ADP Employment Report (May):Expecting 168K, Last 296K.

08:30 - Initial Jobless Claims (Weekly):Expecting 235K, Last 229K.

08:30 - Continuing Claims (Weekly):Last 1.794M.

08:30 - Unit Labor Costs (Q1-rev):Flashed 6.3% q/q SAAR.

08:30 - Non-Farm Productivity (Q1-rev): Flashed -2.7% q/q SAAR.

09:45 - S&P Global Manufacturing PMI (May-F):Flashed 48.5.

10:00 - ISM Manufacturing Index (May):Expecting 47, Last 47.1.

10:00 - Construction Spending (Apr): Expecting 0.2% m/m,Last 0.3% m/m.

10:30 - Natural Gas Inventories (Weekly):Last +96B cf.

11:00 - Oil Inventories (Weekly):Last -12.4566M.

11:00 - Gasoline Stocks (Weekly):Last -2.053M.

The Fed (All Times Eastern)

13:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (DG) (2.39), (HRL) (0.39), (M) (0.46)

After the Close: (AVGO) (10.12), (CHPT) (-0.17), (COO) (3.02), (DELL) (0.86), (LULU) (1.97), (MDB) (0.19), (S) (0.17), (ZS) (0.42)

(ChargePoint is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells CHPT? Learn more now.)

At the time of publication, Guilfoyle was long CRWD and S equity.