February 1, 2023

CrowdStrike Holdings: Eight Reasons to be Bearish

CrowdStrike Holdings, Inc. (CRWD) provides a cloud-delivered solution for next-generation endpoint protection. It offers cloud modules on its Falcon platform through a SaaS subscription-based model. The company offers its services in the United States, Australia, Germany, India, Romania, and the United Kingdom. The company was founded in 2011 and is headquartered in Sunnyvale, California.

Shares of CrowdStrike are little changed in 2021, with losses of 2.04% as of December 31, 2021, with a closing price of $204.75. I am bearish on CRWD stock. I mention below eight key reasons for concern, as well as one factor that is very positive on this cybersecurity stock.

8 Reasons to be Bearish about CRWD Stock

The first reason is the most obvious one: CrowdStrike remains unprofitable on a generally accepted accounting principles (GAAP) basis, with net losses widening in the first nine months of fiscal 2022 compared to the net loss of $92.63 million for fiscal 2021. In the first three-quarters of fiscal 2022 CrowdStrike has reported a net loss of $161.37 million. CRWD stock earnings continue to be volatile, a trend that most probably will be present in 2022.

The second reason is that CrowdStrike shareholders have been diluted in the past year, as total shares outstanding increased by 3.7%.

Third, the annual revenue growth has been declining for the past three consecutive fiscal years. In fiscal 2018, the company reported revenue growth of 125.14%, which declined to 110.37%, 92.70%, and 81.64% for fiscal years 2019, 2020, and 2021 respectively. For a growth stock, this revenue slowdown is a very important negative factor.

Fourth, operating income (EBIT) is negative. CrowdStrike annual operating income for 2021 was $-0.093B, a 36.65% decline from 2020; annual operating income for 2020 was $-0.146B, a 6.72% increase from 2019; and annual operating income for 2019 was $-0.137B, a 4.13% increase from 2018. For the quarter ending October 31, 2021, the operating income reported was $-0.040B, a 66.66% increase year-over-year.

The firm must achieve positive EBIT to improve its business and financial performance and focus on net profitability soon.

Fifth, CrowdStrike increased its debt level significantly in fiscal 2021, reporting long-term debt of $770.02 million. The Debt/Equity ratio surged to 0.8465 in FY 2021. In the previous years, the company did not have any long-term debt.

Sixth, the ROE ratio had worsened to -23.47% in late October 2021. The figure of -21.85% for ROE in early January 2021 shows how weak the profitability for CrowdStrike is.

Seventh, another key metric, EBITDA is negative for fiscal years 2017-2021 and within the first nine months of 2021. It is indicative that for the quarter ending on April 30, 2021, EBITDA reported was ($10.45 million), which worsened to ($25.93 million) the following quarter, ending on July 31, 2021.

The eighth reason is the very elevated valuation. On a relative valuation, CRWD stock is overvalued based on its PB Ratio (49.3x) compared to the U.S. Software industry average (5.7x). The Price/Sales ratio of 36.23 for December 28, 2021, is considered too high considering that the firm is losing money.

There is, however, one key metric that I like, and it’s very positive for CrowdStrike Holdings. The company has a positive free cash flow trend for FY20 and FY21. A figure of $6.95 million in FY20 grew 4,471.81% to $301.01 million in FY21. This positive cash flow generation is evident in all first three quarters of 2021, and net operating cash flows are also positive for the past five consecutive quarters.

Wall Street’s Take

Turning to Wall Street, CrowdStrike Holdings has a Strong Buy consensus rating, based on fifteen Buys, two Holds, and one Sell ratings assigned in the past three months. The average Street CrowdStrike Holdings forecast of  $282.18 implies 37.8% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

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