For IPO investors, Crowdstrike (NASDAQ: CRWD) has been one of the more successful listings of 2019. The IPO price was $34, and the stock traded as high as $67 on the first day. Within two months it was trading at $100.
Despite topping estimates for earnings and revenue on Thursday, the stock price promptly lost 13% on Friday. It appears that investors had set themselves too high a bar, and were expecting more.
A Slight Slowdown in Growth
Second-quarter revenue of $108 million was $4.3 million ahead of analyst forecasts. That was 94% higher than a year earlier and represented a sequential growth of 12%. It also represents a dramatic slowdown in 12-month revenue growth from the previous quarter.
GAAP EPS of $-0.40 were slightly better than expected and the sixth consecutive quarter that the loss per share has declined. However, most investors were looking at the non-GAAP numbers where Crowdstrike lost $0.18 a share versus estimates of $0.23.
Subscription revenue grew 98%, slowing from 116% in the previous quarter. The gross margin for subscription revenue was 76%, improving from 71% a year earlier. The operating margin, however, showed a reversal of the trend toward profitability.
The outlook for the third quarter and full-year were improved substantially. Third-quarter revenue is expected at around $118 million vs $110 million consensuses. The loss per share is expected to fall to $0.12 vs an estimated $0.14.
For the full year, the company expects revenue to be between $445 and $451 million, $15 million ahead of consensus. The full-year loss per share is expected to be between $0.62 and $0.65.
The Results Were Excellent, the Problem Is the Valuation
Despite beating estimates and improving the outlook, the stock price fell immediately after the release. It appears investors are now being forced to reconcile Crowdstrike’s impressive growth and innovative product offering with its sky-high valuation. As impressive as the company’s products and growth are, they may not be enough to support the valuation.
After falling 13%, Crowdstrike is still trading at 50 times 12-month earnings and 40 times its full-year guidance. To bring that multiple down to 10 in the following three years, sales will need to continue growing at 60% each year. Even then, a price to sales ratio of 10 would require growth to keep that sort of pace going.
Crowdstrike’s addressable market is growing, but so are the number of competitors. It’s not impossible that sales could continue to grow at the current pace, but assuming so would be reckless. A lot can happen in the next few years and the risk is to the downside.
Crowdstrike has been a favourite among momentum traders since its listing. With sentiment turning, those traders are likely to move to the next ‘hot money’ stock, causing the price to become oversold in the short term.
Interestingly, the earnings release has resulted in the gap created by the previous earnings release almost closing. If it does close, a short-term support zone may develop between the $69 and $75. There may be a bounce from that area, but a sustained rally seems unlikely. But, if it loses support at $69, there could be far more downside to come as the original IPO investors offload.
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