CrowdStrike (NASDAQ:CRWD) stock benefits from multiple, positive characteristics, including strong technology, impressive partnerships, rapid growth and a high-quality CEO.
History shows that purchasing CRWD stock on major pullbacks nearly always generates significant profits for investors.
Yet the company is also facing tough competition, its valuation is extremely high, and it has to overcome some macro hurdles.
Additionally, I believe that there are better stocks to buy in the IT security space.
In March, Forrester, a highly respected, well-known research firm, called CrowdStrke a leader among the makers of external threat intelligence providers. It cited the company’s Falcon Complete MDR product as a primary reason.
Also validating CrowdStrike’s technology is the fact that it is partnering with very large, leading companies.
Among its partners are Amazon (NASDAQ:AMZN), Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google, ServiceNow (NYSE:NOW) and IBM (NASDAQ:IBM). I don’t believe that such leading companies would partner with CrowdStrike if it did not have superb technology and products.
Meanwhile, CrowdStrike’s growth is quite impressive. In the company’s fiscal 2021, its sales came in at nearly $875 million, up from $481 million in 2019.
In its quarter that ended in July, it reported $338 million of revenue, versus $199 million during the same period a year earlier.
Finally, in its April quarter, its sales came in at $303 million, versus $178 million during the same period a year earlier.
The company’s CEO, George Kurtz, has 28 years of experience in the IT security sector. He was Chief Technology Officer and EVP of Enterprise for McAfee, which was acquired by Intel (NASDAQ:INTC) in 2011.
Tough Competition and a Huge Valuation
Despite all of these tough competitors, I believe that CrowdStrike can keep growing quickly, given the fast growth of the cloud security space and CrowdStrike’s rapidly increasing total available market, or TAM.
The global cloud security market is expected to grow at a compound annual growth rate of 14.2% over the next five years, and CrowdStrike thinks that its TAM could jump to more than $100 billion in 2025.
Yet with all of its tough competitors, CrowdStrike will probably have difficulty raising its prices meaningfully enough to generate significant operating profits within the next year or two. The company’s operating income came in at -$89 million its last fiscal year. In the 12 months that ended in April, its OI was -$110 million.
Given the crowdedness of the space, CrowdStrike is probably going to have to keep spending a great deal of money on sales and marketing, as well as salaries, going forward.
CRWD stock is changing hands for more than 30 times analysts’ average 2022 sales estimate. Given its tough competition, that’s a high price to pay for this name.
With interest rates looking poised to climb, it’s not a good time to buy the shares of tech names with huge valuations. That’s probably a key reason why CRWD stock has only advanced a not-overly-impressive 17% since its February peak.
Another macro challenge is the return to offices. Last year was huge for CrowdStrike and other cloud security names because the work-from-home trend, which makes cloud security more difficult and more critical, was so prevalent. With that trend becoming much less intense, CrowdStrike’s growth could very well decelerate in the coming quarters.
Better Stocks to Buy
Palo Alto Networks appears to have all of the positive attributes of CrowdStrike- impressive partners, rapid growth, and a top-notch CEO.
Palo Alto’s partners include IBM (NYSE:IBM), Siemens, Amazon and VMware (NYSE:VMW). Its fiscal 2021 revenue came in at $4.26 billion, up from $3.4 billion in fiscal 2020. Its CEO, Nikesh Arora, was the COO of Softbank and held a number of leading positions at Google.
But PANW stock has a much more reasonable valuation, as it’s changing hands for less than ten times analysts’ average 20222 revenue estimate.
Then there’s BlackBerry. The company just started partnering with Google and Qualcomm (NASDAQ:QCOM).
It’s also about to unveil an app store, in partnership with Amazon, that should be very lucrative. BB stock is trading for just 7.5 times analysts’ average 2022 sales estimate.
The Bottom Line on CRWD Stock
Over the last year, the shares have nearly always bounced back after major pullbacks. So buying the stock on weakness is not a bad idea.
But overall, Palo Alto and Blackberry look like much better bets than CRWD stock at this point.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.