CrowdStrike Leads the Cybersecurity Pack: Here's the Trade
This morning, we touched on the irony in not just the SEC's X (Twitter) account being hacked and then disseminating what was false information, but also the irony of such an incident occurred the very same day that Morgan Stanley's Hamza Fodderwala had upgraded CrowdStrike (CRWD) and Tenable (TENB) based on increased demand due to an acceleration in cyber attacks. The entire group, which was red hot in 2023, popped a bit more on Tuesday.
Now, there is an investigation in place. What was the motive behind this attack? Was it to drive an upward spike in spot Bitcoin pricing for nefarious purposes? Was it to demonstrate weak links in internet based systems relative to a blockchain-type ledger? Perhaps, we'll know. Perhaps, we won't.
One thing I do think is crystal clear. Even if the economy goes into recession early this year as recent data suggests, or even if it just comes close causing government agencies, businesses (and households) to curb the expense side of their fiscal ledger, the one place where there will likely be inelasticity in demand will be data protection. As more and more data moves to the cloud and as generative AI is enhanced to work for the bad actors, the good guys (cybersecurity providers) will also have to be cloud-based themselves, while interacting AI into how they defend and protect.
The Best Names (My Opinion)
Everyone who follows me knows that I have often referred to Palo Alto Networks (PANW) as the "best in class" cybersecurity provider. Everyone also knows that I have also often openly praised CrowdStrike and Zscaler (ZS) . I am not in Zscaler right now, but all three have been especially kind to my P/L.
I also often wonder if CrowdStrike is on the verge of, or has already captured that "best in class" moniker. It's close. My sleeper pick has been SentinelOne (S) . Since entry and adjusted for trades made outside of my core position, I am still up 150% in CRWD, 80% in S, and 60% in PANW. Not a bad place to be in.
What Are "They" Saying?
This morning I focused on Hamza Fodderwala of Morgan Stanley. Now, Hamza, in my opinion, made a really good call there, but he is rated at one star by TipRanks. What are the highly rated analysts saying about these stocks? Let's focus on 2024 to date using only four and five star rated analysts in order to keep professional opinion updated and relevant.
CrowdStrike.... Year to date, seven highly rated sell-side analysts have opined on CRWD. After allowing for changes, all seven rate the stock as a "buy" or buy-equivalent with an average target price of $307.14. This implies an upside of 12.2% from Tuesday night's close.
Palo Alto Networks.... Year to date, five highly rated sell-side analysts have opined on PANW. After allowing for changes, all five rate the stock as a "buy" or buy-equivalent with an average target price of $350.20. This implies an upside of 16.6% from Tuesday night's close.
Zscaler.... Year to date, six highly rated sell-side analysts have opined on ZS. After allowing for changes, all six rate the stock as a "buy" or buy-equivalent with an average target price of $264.83. This implies an upside of 17.1% from Tuesday night's close.
SentinelOne.... Year to date, just two highly rated sell-side analysts have opined on S. After allowing for changes, both rate the stock as a "hold" or hold-equivalent with an average target price of $26. This implies an upside of 7.6% from Tuesday night's close.
Focus on CrowdStrike (Because It's My Favorite)
CrowdStrike's fourth quarter earnings are not expected until the first week of March. Wall Street is looking for an adjusted EPS of $0.82 on revenue of $839M. This would reflect year over year growth of 74% on revenue growth of about 31.6%. For the third quarter, which was reported in late November... CrowdStrike posted an adjusted EPS of $0.82 on revenue of $786.014M, beating Wall Street on both lines. Annual Recurring Revenue (ARR) increased 35% year over year to $3.15B as of the end of that period. This came on record net new ARR of $223.1M added during Q3. That made CrowdStrike the fastest pure play cybersecurity software vendor in history to reach the $3B mark in total ARR. Rock on.
For that third quarter, CrowdStrike generated operating cash flow of $273.5M. Out of that came CapEx spending of $99.4M, leaving free cash flow of $239M. Through the first nine months of 2023, CrowdStrike generated $819.191M in operating cash flow, while spending $162.55M on capital expenditures. That puts nine months worth of free cash flow at $656.641M. CrowdStrike does not return capital to shareholders, so a lot of this free cash ends up in the firm's cash position.
CrowdStrike ended that quarter with a cash position of $3.166B and current assets of $4.079B. Current liabilities added up to $2.35B, which included deferred revenue of $1.943B. This left the firm at that time with a current ratio of 1.74, but once adjusted for deferred revenue (which we know is not a true financial obligation), this current ratio rises to an incredibly robust 10.0.
Update
Readers will note that CRWD broke out to the upside in late November after coloring within the numbers for almost a year. Relative Strength came off of extremely overbought levels in late December as the shares sold off, only to find support at what had been the upper trendline for that lengthy rally.
The daily MACD (moving average convergence divergence) still looks extended, but the 12 day EMA (exponential moving average) is curling up towards the 26 day EMA. A crossover here would give the algos another reason to rally. I still think a period of basing consolidation could form at some point.
That rebound off of the trendline, was indeed a rebound off of pivot and that pivot was $240 when it happened as opposed to $219 when I first alerted you to it. That allows for an increased target price.
CrowdStrike (CRWD)
- Target Price: $300, up from $262
- Pivot: Upper Trendline of Price Channel ($240)
- Panic: Loss of 50-day SMA (simple moving average) ($226)
- Add: From 21-day EMA down to 50-day SMA
At the time of publication, Stephen Guilfoyle was long CRWD, PANW, S equity.