Opportunity 'Strikes' With This Tech Stock
Here's my take on the report and my strategy for this tech name.
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A bevy of tech stocks reported quarterly financial results on Tuesday, and they all sold off overnight. Among them were Dell Technologies DELL, HP Inc HPQ and Workday WDAY, but also CrowdStrike Holdings CRWD. CrowdStrike? You mean the cyber-security software provider that nearly shutdown global commerce last July with an update to its software that went badly awry?
Yes, that CrowdStrike, the one that has been and remains, a long-time Sarge-name and a name that Sarge added to on that overnight dip. I couldn't believe my eyes. I don't like to add to my longs this far above net basis, but this, in my opinion, was opportunity knocking. A high quality (maybe the best) cybersecurity name was being punished with the crowd (no pun intended), after posting a very solid quarter.
The Numbers
CrowdStrike posted after Tuesday's close an adjusted earnings per share of $0.93 (unadjusted loss per share $0.07) on revenue of $1.011 billion. Both the top-line and adjusted bottom-line prints beat Wall Street's expectations, while that sales number reflected year over year growth of 28.5%. Adjustments were made primarily for the purposes of stock-based compensation and to a lesser degree, costs related to the July 19 incident that the firm appears to have recovered very nicely from.
Annual recurring revenue popped for growth of 27% to $4.02 billion, as remaining performance obligation ramped 46% to a whopping $5.4 billion. Both of these items that illustrate aggressively growing future demand beat Wall Street's estimates.
“With over 97% gross retention, customers remain committed to the technological superiority of the Falcon platform and the benefits of cybersecurity consolidation," noted CEO George Kurtz in the press release.
That retention rate also shows how well the company has traversed what happened last July and how well its customers have moved past it as well. This is truly an incredible (my opinion) story of resilience. Falcon, for those unaware, is CrowdStrike's AI-native security platform that operates entirely in the cloud.
The company also closed more than 260 transactions of $1 million or more during the quarter, which is a firm record. On top of all that, module adoption rates grew to 66%, 47%, 31% and 20% for 5+, 6+, 7+ and 8+ modules respectively. Put bluntly, I am having a hard time understanding those who sold this stock on this news. The stock traded with a $340 handle early this morning. That was down like close to 6.5% from Tuesday afternoon's closing price.
Operations
Of that total revenue of $1.011 billion, which was up 28.5%, subscription sales contributed $962.735 (+31.3%), while services contributed $47.443 million (-9.7%). The cost of that revenue increased 30.8% to $255.087 million. That left an unadjusted gross profit of $755.091 million (+28.6%) on a gross margin of 74.8%, down from 80.6%.
Unadjusted operating expenses grew 38% to $810.814 million, leaving an operating loss of $55.723 million, down from $3.163 million. Adjusted operating income grew 11% to $194.916 million as adjusted operating margin dropped to 19.3% from 22.4%, but crushed expectations that were for something down in the low 17% area.
After accounting for interest, other income & losses and taxes, unadjusted net income attributable to shareholders printed at $-16.822, which works out to $-0.07 per fully diluted share, down from the year ago (pre-July incident) comparison of $0.11. Once adjusted, net income attributable to shareholders printed at $245.536M or $0.93 per fully diluted share, up from the year ago comp of $0.82.
Guidance
For the current quarter, CrowdStrike is projecting total sales of $1.0287 billion to $1.0354 billion. Wall Street was looking for about $1.03 billion, so at the midpoint, this is a beat. The firm also sees adjusted operating income of $184 million to $189 million and adjusted net income attributable to shareholders of $210.9 million to $215.8 million. This should land adjusted EPS at $0.84 to $0.86. At the midpoint, that guidance fell a penny short of the $0.86 consensus.
For the full year, CrowdStrike sees total sales of $3.9238 billion to $3.9305 billion. Even at the low end, this is well above the $3.9 billion that Wall Street had in mind. Adjusted operating income is seen at $804.4 million to $809.4 million, while adjusted net income is seen at $937.5 million to $942.6 million. That should put full year adjusted EPS at $3.74 to $3.76. Again, this is well ahead of the street view of $3.64. This is overall, strong guidance.
Fundamentals
For the quarter reported, CrowdStrike generated operating cash flow of $326.136 billion. Out of this came capital spending of $78.704 million, spending on internal use capitalized software of $16.271 million, and $606,000 in the purchase of deferred compensation investments. That left free cash flow of $230.555 million. The company does not return capital to shareholders.
Turning to the balance sheet, CrowdStrike ended the period with a cash position of $4.26 billion and current assets of $5.572 billion. Current liabilities add up to nearly $3 billion even. Within that number, there is no short-term debt on the books, but there is $2.363 billion in deferred revenue which is not a true financial obligation. At the headline, this puts the firm's current ratio at a healthy 1.86. When adjusted for deferred revenue, that current ratio jumps to an almost absurdly muscular 8.75.
Total assets amount to $7.783 billion, which does include $831.37 million in goodwill and other intangibles. At less than 11% of total assets, this is of no concern. Total liabilities less equity comes to $4.687 billion, including long-term debt of $743.61 million, which is something the firm could pay off out of pocket almost six times over, and another $833.26 million in deferred revenue. This is a well-managed, almost fortress-like balance sheet.
Wall Street
Since last night, I have come across 20 highly rated analyst who have opined on CRWD. Many made target price increases. Across the 20, there are 17 "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. That left us with 18 of those to work with.
The average target price across those 18 analysts is $380.78 with a high of $420 (Mike Cikos (Needham) and a low of $300 (Patrick Colville of Scotiabank). One those two are omitted as potential outliers, the average target rises to $383.38. In Mike Cikos' note where he increased his target to $420 from $360, he points out the retention rate that we mentioned above and praises the company for turning a crisis into an opportunity.
My Thoughts
The quarter was strong. Execution was strong. Cash flows were strong. Guidance is strong. The balance sheet is strong. Wall Street's response is positive. Did I miss anything? This dip is in my opinion an opportunity to add to my long position despite that my net basis for this name is much, much lower.
Readers will see that on the rebound from the early August low, the stock hit some resistance at a 61.8% Fibonacci Retracement level of the July sell-off in October. The stock then overcame this resistance a rough two weeks ago.
The stock developed a new trend that fits neatly into a regression model starting at those August lows, taking the stock above its 21-day exponential moving average, as well as its 50-day and 200-day simple moving averages. Last week, the stock tried to break out of the upper trendline of this model and has now failed.
Suddenly, Relative Strength has weakened but is still considerably above what would be neutral. The daily moving average convergence divergence is still postured bullishly even if ever so slightly. That 12-day EMA is threatening to cross under the 26-day EMA, but that has not yet happened.
Note that as the stock has sold off this morning, the 50-day SMA has crossed above the 200-day SMA. That's a "golden cross", which is a technical positive. The stock also looks to have found support as it has approached the 21-day EMA. This will keep the swing traders on sides as the golden cross will prevent institutional portfolio managers from taking profits. Our pivot for this name remains the upper trendline of the regression model. This currently stands at $373 but of course is moving and will change every day.
CrowdStrike Holdings
Target Price: $445 (high on the street)
Pivot: $373 (moving trendline)
Add: Down to 21-day EMA $340
Panic: Loss of 200-day SMA (currently $312)
At the time of publication, Guilfoyle was long CRWD equity.
