Investors should view the 35% decline in CrowdStrike (NASDAQ:CRWD) stock over the last month as a potential buying opportunity rather than a sign that something more serious is wrong with the cybersecurity company.
After a spectacular 85% gain between December of last year and this November, CRWD stock peaked at $298.48 on Nov. 9 and has sold off sharply.
It fell more than $100 per share over the past three weeks, though it trades today at nearly $205. The sudden and steep decline has divided analysts, with some urging investors to buy the dip and others warning that a longer, more prolonged slump is in store for CrowdStrike’s stock.
In the near term, CrowdStrike’s drop seems to be accelerating with the selloff in the broader technology sector. Given the current volatility, investors may want to wait for signs of a bottom and take a dive into the company’s fundamentals to understand what has led to the reversal in fortune for CRWD stock.
A Closer Look at CRWD Stock
CrowdStrike just reported great third quarter financial results. Unfortunately they were announced on Dec. 1, the same day that the first case of the omicron variant of Covid-19 was detected in the U.S. and stock markets sold off heavily.
Lost in the panic over the omicron variant was the fact that CrowdStrike’s Q3 revenue rose 63% year-over-year to $381 million. Plus, the company’s free cash flow increased 62% to $124 million, and its earnings per share (EPS) came in at $0.17, up 113% from $0.08 a year earlier.
CrowdStrike’s earnings beat analysts’ estimates across the board.
However, while CRWD stock rose in after hours trading following its superb third quarter results, the shares couldn’t buck the market volatility and downward spiral of the past few trading sessions.
The decline is disappointing, especially after the company raised its full-year guidance to say it now expects its revenue to come in at $1.43 billion, up about $30 million from its previous forecast.
CrowdStrike continues to take steps to grow and maintain its leadership position in the cybersecurity space having recently announced that it is acquiring zero-trust software security start-up SecureCircle.
Valuation Concerns
While Wall Street analysts acknowledge CrowdStrike’s stellar growth and earnings, some continue to take issue with the valuation of CRWD stock. They observe that even after its recent plunge the shares still trades at more than 120 times trailing 12-month free cash flow. That maked it quite expensive by their lights.
In a November 15 note to clients, investment bank Morgan Stanley (NYSE:MS) flagged CrowdStrike’s valuation when initiating coverage of the company at an “underweight” rating and stating that the company faces rising competition.
The Morgan Stanley rating sent CRWD stock down 10% on the day it was made public. However, Morgan Stanley’s price target on CrowdStrike’s stock of $247 per share is higher than the $2o5 at which the shares currently trade, indicating just how far and fast the stock has crumbled.
Other issues of concern raised about CrowdStrike include that competition is becoming an issue in the increasingly crowded cybersecurity sector.
However, it should be noted that Crowdstrike continues to distinguish itself by offering a one-stop shop for cybersecurity needs with its endpoint security that is akin to antivirus software that’s installed on many computers.
Plus, Crowdstrike continues to grow its subscription customer base having reported an 81% year-over-year expansion and a net retention rate of 125% as customers increased their spending on its various cybersecurity products.
The number of customers who now deploy four or more CrowdStrike products rose from 57% last year to 66% so far in 2021.
Buy CRWD Stock at the Right Time
There are plenty of reasons to remain bullish on CrowdStrike. The company continues to report impressive growth and earnings and remains a leader in the cybersecurity industry.
Fundamentally, the company is rock solid. The selloff in the stock over the past few weeks reflects the broader market decline. The fact that some people on Wall Street have concerns about the stock’s valuation after it gained 654% from March 2020 when the Covid-19 pandemic began through early November of this year is another factor.
While some pullback was probably warranted, the view appears to be that the decline has been overdone at this point. Investors should plan to buy CRWD stock, but should do so at the right time. Wait for the share price to reverse higher before taking a position.
Disclosure: On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
