CrowdStrike Holdings (NASDAQ: CRWD) listed on the NASDAQ exchange last week, and has already gained more than 100%. The current share price of around $75 puts the company’s value at more than twice that of rival Symantec (NASDAQ: SYMC). CrowdStrike earned $249 million in sales in the last year, which is around 5% of the $4.73 billion earned by Symantec. Does this mean CrowdStrike, trading at over 100 times sales, is overvalued? Or is Symantec in fact offering an opportunity?
Has Symantec Fallen Too Far?
Symantec, which produces the Norton suite of cybersecurity products, has had a tough time lately. Last year the company was engaged in an internal audit investigation over previously published financial results, Then, in May, the CEO resigned after a period of weak revenue and profit growth. And finally, it recently came to light that Symantec had suffered a data breach by a hacker at one of its Australian labs. The company insists the lab was an isolated research facility and that only test data was stolen. Regardless of the severity of the incident, an IT security company being hacked doesn’t look good, and the breach has only added to the negative sentiment surrounding the company.
Until a week ago Goldman Sachs was the only brokerage firm with a buy rating on Symantec. However, with the stock down some 45% in the last 2 years, it is beginning to look attractive – especially when one considers the valuations other cybersecurity stocks are commanding. Symantec trades on a forward PE of 11 and a price to sales ratio of 2.6. While it is barely profitable, the company is not burning cash like many of its peers. This week Mizuho Securities also upgraded the stock to a buy.
CrowdStrike Ticks All The Boxes for the Current Market Environment
CrowdStrike differentiates itself by offering cloud-based security solution that crowdsources data regarding the latest cyber threats. CEO, George Kurtz hopes investors will see it as the Salesforce of cybersecurity with combined exposure to two growing industries. CrowdStrike’s products are clearly a hit and the company has consistently grown year-over-year earnings at over 100% for the last two years.
The fact that the company is a long way from being profitable isn’t necessarily a problem while revenue growth remains strong. Sector leader Palo Alto Networks (NYSE: PANW) has been running an operating loss since 2013 which hasn’t stopped its share price increasing five-fold. Investors have instead focused on strong sales growth and the gross margin which is above 70%.
A Long Way To Go To Justify The Price Tag
Software, particularly cloud software, and cybersecurity solutions are hot industries right now, so it’s not surprising that the IPO has been so well received. However, the possibility that cloud software stocks are heading into bubble territory can’t be ignored.
The biggest risk for CrowdStrike’s stock price is that such a bubble bursts before the company has a chance to grow into its valuation. CrowdStrike will need to maintain its current revenue growth rate for at least 3 years to bring its price-to-sales ratio down to a reasonable level, and a lot can change in that time. If investors become more discerning and begin to look at profitability rather than revenue, CrowdStrike will be vulnerable. In the medium term the momentum may continue — but at current levels the stock has to be viewed as highly speculative as an investment.
While Symantec does come with risks, to a large extent those risks are priced into the stock. If the newer, more expensive, security stocks come under pressure, investors wanting exposure to cybersecurity software will be looking to the likes of Symantec. This is a stock to watch in the coming months.
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