I don’t often buy the stocks of money-losing companies — especially money-losing companies with price-sales ratios that are well above 10. And, with very few exceptions, I will only pull the trigger on such companies if they have a tremendous advantage over their competitors. Such an edge usually comes in the form of a clearly superior product or a first-mover advantage. CrowdStrike (NASDAQ:CRWD) stock is a name that’s trading for around 40 times its sales.
But it lacks those important advantages.
I’m far from an expert on either cybersecurity or CrowdStrike. But it appears that CrowdStrike and those who are bullish on CRWD stock mainly tout its use of artificial intelligence and its ability to protect data on the cloud.
However, multiple other companies now have both attributes. BlackBerry’s (NYSE:BB) Cylance unit, for example, has long used AI to prevent cybersecurity attacks. And back in November 2018, it launched a “cloud security solution” for Amazon’s (NASDAQ:AMZN) cloud product. Of course, Amazon’s cloud product, AWS, is the world’s leading cloud infrastructure offering.
And there’s some evidence that Cylance is no slouch in terms of technology. In 2019, it won the Best Innovator Award from SE Labs. Also last year, the unit claimed that it had won “excellence awards in five categories.”
Last quarter, Cylance’s revenue came in at $49 million, even though its sales dropped 4% year-over-year. CrowdStrike’s revenue for all of 2019 was $250 million, versus Cylance’s annual run rate of $196 million. So CrowdStrike actually isn’t so far ahead of Cylance when it comes to revenue and market share.
Multiple other IT companies are utilizing AI and optimizing their products for the cloud. For example, International Business Machines (NYSE:IBM) is using AI to enhance its cybersecurity offerings, while Datadog (NASDAQ:DDOG) is offering cloud security services.
CrowdStrike’s Growth Is Dropping
The year-over-year growth of CrowdStrike’s revenue dropped from 94% in the second quarter of 2019 to 85% last quarter. In Q3 of 2019, CrowdStrike’s reported a net loss of $35.5 million. Last quarter, the metric was a loss of $19 million.
A $16.5 million bottom-line improvement over six months for a company with a huge valuation just doesn’t strike me as very impressive. A big reason for the company’s slow bottom-line growth is the rapid increase of its expenses. CrowdStrike’s operating expenses jumped to $153 million last quarter from $126 million in the third quarter of 2019. Those who own CRWD stock may want to keep an eye on the company’s expenses to see if it can get them under control going forward.
CrowdStrike Faces Other Headwinds
CRWD stock has gotten a boost from the stay-at-home trend. That makes sense, as the trend creates more endpoints that companies need to defend from hackers. Since CrowdStrike prices its products per endpoint, the trend has undoubtedly increased CrowdStrike’s top line.
But with the novel coronavirus threat easing in some parts of the country and a vaccine seemingly on the way by the end of the year, the strength of this positive catalyst will also ease soon.
Indeed, that is likely why CRWD stock, along with many other tech names, has lost momentum in recent days.
The Bottom Line on CRWD Stock
The shares are trading at almost 40 times the company’s 2019 sales, even though it has no obvious technological edge or first-mover advantage. Moreover, the company’s growth has slowed and its bottom line has increased relatively slowly in recent quarters. Finally, the work-from-home trend is losing momentum.
I’ve been overly bearish about a few high-flying tech names that Wall Street loves, but I would certainly not recommend buying CRWD stock at its current levels.
As of this writing, Larry Ramer owned shares of BlackBerry (BB). Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been Roku, oil stocks and Snap. Larry began writing columns for InvestorPlace in 2015. You can reach him on StockTwits at @larryramer.