The CrowdStrike [CRWD] share price has fallen almost 17% so far in 2022, with the cloud-based cybersecurity firm extending its losses which began back in November, as it seeks to recover from a challenging 2021.
While the stock has a sky-high valuation – which could create further volatility – it boasts highly-rated products, coupled with a strong market share. However, threats include growing competition in the face of SentinelOne [S], a newly-public company which is growing faster than CrowdStrike, while Alphabet [GOOGL] could soon crowd the market with the recent acquisition of cybersecurity firm Siemplify.
Meanwhile, CrowdStrike has yet to record a profit – in fact its losses are widening. Yet it remains an exciting stock in a burgeoning market. So, does the stock’s current price offer investors a chance to buy the dip for a stock that could surge? Or, are the company’s headwinds too strong to overcome?
What’s happening with the CrowdStrike share price?
CrowdStrike’s share price hasn’t escaped the recent wider stock market malaise, with rising bond yields and growing talk of an interest-rate hike accelerating the decline in high-value stocks. CrowdStrike shares have spiralled 20.65% in just the last month, and 44.81% in little more than two months from its 10 November all-time high at $298.48. Since the stock’s launch back in June 2019, however, CrowdStrike’s share price is still up over 150%.
High valuation and fresh competition urge caution
CrowdStrike is trading at a price-to-sales ratio in excess of 32, which is “high even for a fast-growing company”, says Motley Fool’s Bradley Guichard, who points out that the cybersecurity firm’s currency valuation is higher “than more established and profitable companies like Fortinet [FTNT] and Palo Alto [PANW]”.
CrowdStrike’s excessive valuation – with the company yet to make a profit – could be further damaged by an imminent rise in US interest rates to combat fast-rising inflation, which could be raised up to four times this year. According to Seeking Alpha’s Eric Lim, the stock’s “high valuation will continue to pressure CrowdStrike despite its massive potential”.
“high valuation will continue to pressure CrowdStrike despite its massive potential” - Motley Fool's Eric Lim
Another potential problem for CrowdStrike is growing competition. SentinelOne, which went public in June 2021, is showing “much faster growth than CrowdStrike”, says Motley Fool’s Bradley Guichard: SentinelOne's nine-month revenue to 31 October of $139m was 120% higher versus the same period in 2020. In addition, Alphabet’s recent acquisition of Siemplify is also likely to intensify the competition, and could have an effect on earnings, and CrowdStrike's share price growth potential.
Recognition, industry potential offer reasons to be positive
CrowdStrike has achieved a significant market share, earned through its highly-rated products and a reputation for industry-leading threat detection. Research companies and independent testing organisations alike have recognised CrowdStrike, including Gartner, Forrester Research, and SE Labs, reports Motley Fool’s Trevor Jennewine.
This kind of recognition can only benefit the company, at a time when the growth in remote working and digital transformation has aided the rise of cloud computing – which has also led to the growing threat of cyber attacks. Cybercrime damages will reach $10.5tn annually by 2025, a rise of $4tn in just four years, according to Cybersecurity Ventures, reports Jennewine. It’s clear that the requirement for robust cyber security solutions is only expected to grow – CrowdStrike estimates its total addressable market is $54.8bn now, but will grow to $67.1bn within just two years.
Annual total of cybercrime damages expected by 2025
CrowdStrike figures show the pace of the organisation’s growth: for the nine months ended 31 October 2021, the company hit $1bn in sales, up 67% versus $609m for the same period in 2020, while revenue is growing at about 63% to $380m, according to Lim. In its last quarter, CrowdStrike’s 14,687 customers was 75% higher year-on-year. And the icing on the cake is that a retention rate above 120% – now for 15 consecutive quarters – shows that customers continue to spend more each year.
It should be noted however that profit remains elusive, with a loss of -$119m from operations for nine months to 31 October, escalating from a -$77m loss for the same period in 2020. However, according to Guichard, CrowdStrike is “forgoing profits in the short term by spending much of its revenue on sales and marketing. This spending is paying off now with increases in customers and revenues and will continue to pay dividends in the future”. As such, potential investors might consider investment in CrowdStrike’s share price a longer-term play.
What’s next for CrowdStrike’s share price?
The 27 analysts offering 12-month price forecasts for CrowdStrike have an average price target of $283.80, with a high estimate of $340.00 and a low estimate of $197.00. The median estimate represents a 72.28% increase from the last price of $164.73, and would take the shares back to within touching distance of its all-time high. With 23 Buy, three Outperform, three Hold and one Sell rating, the current consensus among analysts is an emphatic Buy.
While profit remains elusive and its valuation is concerning, there is much to like about CrowdStrike, coupled with a huge and still growing market. In fact, Jennewine says he “wouldn't be surprised to see CrowdStrike grow fourfold over the next decade”. While it may be a rocky ride for the CrowdStrike share price, its long-term prospects look bright.
Although the company is currently reporting a net loss, its fast growth and increasing efficiency can quickly lead to profitability, potentially demonstrating the strength of CrowdStrike in a growing cloud-based cyber security industry, and thus, potentially justifying the company's high valuation.
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