Summary
Shares of CrowdStrike declined in after-hours trading yesterday, despite the company beating expectations and increasing the full-year guidance.
The decline is potentially driven by ARR concerns or the stock simply running ahead of itself into earnings.
I believe ARR concerns are unfounded, and that CrowdStrike is well-positioned to deliver strong growth in the following quarters and years.
Companies like Snowflake and Cloudflare recently reported underwhelming results, and their share prices are recovering regardless. We could see the same scenario unfold with CrowdStrike, and more so since the results were comparatively stronger.
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Shares of CrowdStrike $CrowdStrike Holdings, Inc.(CRWD)$ took a hit right out of the gate this morning despite the company beating EPS and revenue estimates, providing fiscal Q2 2024 guidance above Street expectations, and raising the full-year guidance range.
I am not sure why there was a negative reaction to the report. Perhaps it is because of the unfounded concern about ARR growth or the stock getting ahead of itself prior to the company reporting, but the business is in good shape and I still see CrowdStrike as well as, competitor and our portfolio company, SentinelOne $SentinelOne, Inc(S)$ as very well positioned to continue capturing market share in the growing cybersecurity market.
Yes, growth rates are coming down, but that was largely expected and growth is better than we thought it would be just a few months ago. I wondered earlier this year if the guidance the two companies provided for their fiscal 2024 is conservative and set up for a beat-and-raise year, or whether the macro headwinds will put pressure on their respective businesses throughout the year. It now appears it was the former - that CrowdStrike has set expectations properly in order to beat them. SentinelOne reports after the close today, and I believe we should see the same beat-and-raise pattern.
Looking at the fiscal Q1 2024 numbers, everything looks good or great relative to expectations.
The good part is the ARR, which increased 42% Y/Y to $2.73 billion with a $174 million increase in net new ARR. This was just slightly above the consensus and a potential reason the stock declined after the earnings report was out. On the earnings call, management said that while they are raising guidance for the full fiscal 2024, they do have a 10% Y/Y headwind to net new ARR in the first half of the year, but that they expect to return to Y/Y growth in net new ARR in the second half of fiscal 2024. This refers to sequential changes in ARR versus the same quarter last year, as it added $190 million in net new ARR in fiscal Q1 2023 versus "just" $174 million in fiscal Q1 2024.
I see nothing wrong with these dynamics, considering the macro headwinds and the elongated sales cycles.
Revenue grew 42% Y/Y and 8.7% sequentially to $692.6 million, beating the analyst consensus by $16.3 million and non-GAAP EPS of $0.57 beat the $0.50 consensus.
GAAP subscription gross margin was 78% and the non-GAAP gross margin was 80%, reaching new highs and exceeding expectations. The improvements were driven by data center and workload optimization, and the use of AI has benefited the business by lowering costs and bringing higher margins.
The fiscal Q2 outlook was also positive. The company expects total revenue between $717.2 million and $727.4 million with the mid-point above the $718.6 million consensus and non-GAAP EPS of $0.54-$0.57 which was also above the $0.54 consensus.
The guidance range for the full-year fiscal 2024 was also raised - total revenue of $3,000.5-$3,036.7 million versus the $3 billion consensus and the previous guidance range of $2,955.1-$3,014.8 million and non-GAAP EPS of $2.32-$2.43 versus the $2.31 consensus and prior guidance of $2.21-$2.39.
Overall, the results are good and CrowdStrike's business remains in very good shape despite the macro headwinds and elongated sales cycle. And the company is expecting to return to net new ARR growth in the second half of fiscal 2024 is also good to see and implies net new ARR growth of more than $200 million and $225 million in fiscal Q3 and fiscal Q4, respectively.
Yes, growth is slowing down, but that was the consensus for quite some time and growth is not slowing down as fast as the market was expecting.
And if recent market reactions to similar companies are a guide, the stock has a decent shot at rebounding in the following weeks, which is part of the reason I initiated a position in CrowdStrike. In particular, Snowflake $Snowflake(SNOW)$ and Cloudflare $Cloudflare, Inc.(NET)$ reported disappointing quarterly results and provided weaker-than-expected guidance. Both stocks plunged post-earnings, but have since recovered, with Cloudflare's recovery being particularly strong and surprising.
YCharts, author's annotations
And unlike Snowflake and Cloudflare, CrowdStrike did not disappoint - it beat EPS and revenue estimates and increased the full-year guidance. Both stocks are now trading at premium valuations in terms of EV/revenue to CrowdStrike despite the change in expectations as CrowdStrike is now likely to show stronger growth than Snowflake and Cloudflare. I expect upward revisions for CrowdStrike versus lowered expectations for Snowflake and Cloudflare.
YCharts
Seeking Alpha
I should also note that the chart above is not yet corrected for CrowdStrike's share price decline and the recent fiscal quarter results are not included in the TTM calculation by YCharts which means the EV/revenue is around 14 with the stock trading in the low 140s as of this writing. It also shows SentinelOne as more attractively valued and with higher expected growth rates and the reason I am also long SentinelOne.
Conclusion
Shares of CrowdStrike are potentially down due to the ARR concerns or the stock simply running too hot ahead of the earnings report. Either way, I see CrowdStrike and the cybersecurity industry as well positioned to grow significantly in the following years and for companies like CrowdStrike and SentinelOne to continue to grab market share. I believe it is reasonably likely to expect the stock to recover from the earnings-driven decline in the following weeks.
Source: Seeking Alpha
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