We are living through a fascinating market in 2022. Yes, it's frustrating sometimes, and there is fear to spare, but there are also enticing opportunities for long-term investors. The key is to know where to look and when to pounce. It's impossible to catch the exact market bottom consistently, but setting a limit price and having patience can maximize future gains.
Cybersecurity company CrowdStrike (CRWD -4.20%) pulled back more than 50% from its 52-week high but has since risen more than 30% off its 52-week low. It can be tempting to rush back in, but this momentary calm in the growth market may not last. Inflation is still at a 40-year high, and many believe a recession is coming. Because of this, growth stocks will likely experience another significant pullback.
Explosive expansion
CrowdStrike provides AI-powered cyber protection with its cloud-based Falcon platform. The platform offers multiple modules of protection that customers can tailor to their needs. These include endpoint protection, threat intelligence, log management, and several others.
CrowdStrike stock will likely experience another pullback due to the macroeconomic picture, and long-term investors should consider opening or adding to their position when it does. CrowdStrike has some incredible metrics.
First, the cybersecurity market is in focus. A recent survey by PwC found that cyberattacks were the #1 concern among CEOs -- ahead of macroeconomic issues like inflation and recession. Because of this, spending on cybersecurity ought to be robust even if the economy slows. CrowdStrike has a rapidly expanding total addressable market that it believes will be well over $100 billion by 2025.
For growing Software-as-a-Service (SaaS) companies, two metrics will tell us a tremendous amount about management's execution and the company's future. These are:
- Customer expansion
- Annual Recurring Revenue (ARR) growth
CrowdStrike has grown its customer base at an incredible rate. At the end of the prior fiscal year, it reported 16,325 customers, an increase of 6,429, or 65%, for the year. The company's customer acquisitions over the past several years are graphed below.
Data source: CrowdStrike. Chart by author.
As expected, subscription ARR growth is exceptional. ARR refers to subscription revenue on an annualized basis. As of Q1 FY 2023, the company reported an ARR of $1.9 billion on 61% year-over-year (YoY) growth.
SaaS metrics off the chart
SaaS companies also have other standards that are used to measure performance.
Some of these include:
The DBNR measures the change in the average customer spending with the company over time. This way, we can judge how effectively management grows sales among existing clients. Any value over 100% indicates success, and CrowdStrike reports a number consistently above 120%.
It is also essential that CrowdStrike keep its current customers. The company's gross retention rate is above 98%, which is tough to beat.
Gross margin is a key profitability measure as many fast-growing SaaS companies are not yet GAAP (generally accepted accounting principles) profitable. A high gross margin indicates an ability to scale effectively. CrowdStrike's overall gross margin of 77% compares well with competitors like Zscaler, which comes in a touch higher at 78%, and SentinelOne at 63%.
Each of these metrics indicated a bright future for CrowdStrike.
Getting in at the right price
The beauty of growth stocks is that investors can afford to be patient. There are no rising dividends to miss out on, and they tend to be more volatile than other stocks. Investors should consider where they feel shares will offer good value and be ready to pounce when they drop. We generally aren't going to catch the absolute bottom, so a few tiered limit orders may be the way to go.
CrowdStrike is currently trading for a price-to-sales (P/S) ratio of 24. Given the rising rates and recession fears, this could be too high for the current market. Growth-stock competitor Zscaler is trading a bit lower, while other more established cybersecurity companies are trading much lower, as shown below.
CRWD PS Ratio data by YCharts.
CrowdStrike does deserve a slight premium due to its tremendous growth rate; however, a P/S ratio between 15 and 20 would offer investors better value. Given the persistent downward pressure in the chart above, investors may have the chance to capitalize soon.
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June 30, 2022 at 09:43PM
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Is It Better to Buy CrowdStrike Now or Wait for a Better Price? - The Motley Fool
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