Shares of CrowdStrike (NASDAQ:CRWD) Holdings Inc. (NASDAQ:CRWD) recently experienced a significant plunge, shedding over 42% of their value within just two weeks, which wiped out approximately $40 billion of its market cap.
The sharp decline was triggered by an unexpected issue when the company released a flawed sensor configuration update for its Falcon platform, resulting in around 8.50 million Windows devices crashing. The impact was severe, affecting critical facilities such as airports and hospitals, leading to grounded flights, canceled procedures and widespread disruption.
As a result, the stock dropped to levels not seen since December 2023.
The disruption also added millions of dollars in consultancy man-hours to corporate IT budgets as they scrambled to restore their applications, with total damages potentially reaching around $1 billion according to the Anderson Economic Group.
Despite the negative press and financial implications of the outage, I view this decline as a potential buying opportunity. I prefer to focus on the company's unfolding fundamentals, which continue to show stellar performance and a strong commitment to innovation. Previously, I was hesitant to invest in CrowdStrike due to its high valuation and limited margin for safety. However, the post-outage dip has made its valuation much more attractive.
Core value proposition remains intactDespite the disruption caused by the update, I believe CrowdStrike's fundamental value proposition remains intact. While there are numerous cybersecurity alternatives available, what sets the company apart is its exceptional user-friendliness. It offers an all-in-one solution that seamlessly integrates all necessary cybersecurity elements, delivering a superior user experience.
Although the recent event may temporarily impact CrowdStrike's pricing power and short-term revenue growth, I expect it to be short-lived. The fact that so many organizations worldwide were indirectly impacted underscores Falcon's widespread adoption and trust as a cybersecurity tool. Importantly, Falcon's reputation remains largely unscathed, as the issue was not the result of a successful cyberattack, but rather a technical malfunction.
Cost and transition challenges for customersCrowdStrike's single-platform solution covers both cloud and on-premises systems and networks, so customers looking to make a switch to competitors like Palo Alto Networks (NASDAQ:PANW (NASDAQ:PANW)) is feasible but costly. Transitioning would require customers to purchase multiple platforms for the similar hybrid-environment coverage that Crowdstike provides, leading to additional expenses and training challenges for cybersecurity staff and users.
Given CrowdStrike's proven 1:6 cost savings, its single-platform solution should remain highly attractive to consumers, especially during periods of flat IT spending. Further, as enterprises increasingly test generative artificial intelligence features, the company's AI-native platform is likely to remain the preferred solution for securing large language models in both public and private clouds. This underscores my confidence in the company's sustained growth trajectory through the adoption of AI in enterprise settings.
Source: CrowdStrike
Cross-selling strengthOne of CrowdStrike's key strengths lies in the cross-selling capabilities of its Falcon platform, which has seen considerable success. This is evident in the growing percentage of customers who are adopting five or more modules.
In the first quarter of 2024, deals involving eight or more modules more than doubled year over year, highlighting the platform's expanding appeal. Additionally, compared to the fourth quarter of 2024, the percentage of subscription customers adopting five or more, six or more and seven or more modules each increased by one percentage point. This robust cross-selling strategy not only drives revenue growth, but also creates significant switching costs, making it difficult for customers to transition to another cybersecurity vendor. For those customers who have adopted five or more modules, switching costs are particularly high, and these clients now represent nearly two-thirds of CrowdStrike's total customer base. I believe this stickiness will minimize any long-term disruption from the update-related issue.
Financial and market performanceAlthough the fundamentals may seem secondary under current circumstances, they ultimately determine the long-term direction of a company's value. CrowdStrike managed to positively surprise investors with another beat-and-raise quarter with its fiscal first-quarter 2025 earnings release, bucking the negative trend seen in other cybersecurity players. While I anticipate some customer attrition due to the recent incident, I believe the company will experience only a slight shortfall in second-quarter guidance. However, I expect CrowdStrike to recover quickly, achieving its full-year guidance target of 30% to 31% top-line growth, reaching $3.90 billion to $4.10 billion in revenue.
Although the sales process may be elongated in the near term, I do not expect this to last beyond the second quarter of this year due to CrowdStrike's Falcon platform's ease of integration across all systems, whether on-premises or the cloud.
Source: CrowdStrike
Comparing CrowdStrike with Palo Alto Networks shows that the former's top line has grown about 250% over the last three years, dwarfing the latter's nearly 60% growth over the same period. Future growth is also expected to be higher for CrowdStrike given its comparatively higher business potential, with this high revenue growth rate likely to be sustained by the expansion in the AI-native cybersecurity market, aligned with its partnerships with companies like Nvidia (NASDAQ:NVDA).
The addressable market for AI-native cybersecurity platforms is estimated to grow from $100 billion in 2024 to $225 billion in 2028, representing a compound annual growth rate of 23%. CrowdStrike is not only growing its subscription business at double-digit rates, but is also already widely profitable in terms of operating income, net income and free cash flow.
The company generated $323 million in free cash flow in the first quarter, reflecting a year-over-year growth rate of 42%. This strong free cash flow trend underscores a highly profitable core business. Further, CrowdStrike achieved a free cash flow margin of 35% during the quarter, showing a year-over-year expansion of 2 percentage points. This prolific cash generation has allowed the company to amass a cash hoard of $3.70 billion against $740 million in long-term debt, enabling it to fund growth and make strategic acquisitions.
Despite negative Ebit in recent fiscal years, there has been a massive turnaround in trailing 12-month Ebit. The previous negative Ebit was due to CrowdStrike's aggressive ramp-up in selling, general and administrative costs as well as research and development expenditures, which is clearly reflected in top-line growth during those periods. This quality of revenue growth is a great sign, showing additional spending leads to greater growth. The company's focus on higher spending was well aligned with its ultimate goal of becoming GAAP profitable. Although CrowdStrike is not a mature company yet, the clear trend toward higher levels of core returns in the future is promising.
Looking at Crowdstrike's remaining performance obligations, a good indicator of future revenue growth, we see an encouraging trend. RPOs reached approximately $4.70 billion at the end of the first quarter, showing a small increase compared to the fourth quarter of the previous year. Considering the seasonality of previous years, this can be regarded as a positive indicator. The year-over-year growth rate increased to about 42% from over 30% levels in previous quarters, which is also encouraging.
Valuation perspectiveFrom a valuation standpoint, I am maintaining my bullish outlook for CrowdStrike, setting a price target of $390 per share at a price-sales ratio of 20, which represents about 45% upside from current price levels.
In the short term, shares may experience continued drawdowns as investors reassess their positions, but I believe this will be a temporary phase, presenting a buying opportunity for those who missed out on buying the stock during its early growth phases. Historically, CrowdStrike's price-sales ratio has been significantly higher (topped at 38 times, more than double than what it is trading at currently), with a notable trough forming in late 2022 and through 2023.
At current prices, CrowdStrike is priced cheaper than 75% of the time over the past five years, indicating the stock is undervalued given the expected continued growth in both top and bottom lines over the next several years.
Now that CrowdStrike is on the verge of becoming consistently GAAP profitable, I see significant value at these levels. Although shares trade in line with peers, I believe the company provides a better value proposition due to its comparatively stronger growth prospects moving forward thanks to its superior market positioning.
While I remain bullish on CrowdStrike, I do expect some continued downside potential as investors seek a price floor. Any major dips should be viewed as good buying opportunities to average into a position.
Source: Alpha Spread
Looking at a discounted cash flow perspective, I used a discount rate of 8% (the company's weighted average cost of capital) with a terminal growth rate of 5% (extremely conservative). This analysis follows an initial growth forecast for the first five years, in line with Wall Street's growth forecasts. Wall Street remains optimistic about CrowdStrike's growth prospects as it expands beyond its endpoint domain. The robustness and scalability of its Falcon platform have been demonstrated, justifying this optimism. Considering all these factors, I still derive an upside of 11% at a fair value of $300 per share, also providing a good margin of safety from current price levels.
Closing thoughtsIn the face of recent turbulence, CrowdStrike remains a strong player in the cybersecurity space, bolstered by its innovative Falcon platform, expanding customer base and promising financial trajectory. The recent dip in its share price, while concerning in the short term, offers a compelling entry point for long-term investors.
As CrowdStrike approaches consistent GAAP profitability and continues to demonstrate strong growth potential, I see significant upside from current levels. Investors should view any further weakness as an opportunity to accumulate shares in this high-growth cybersecurity leader.
This content was originally published on Gurufocus.com
