Investors interested in CrowdStrike (NASDAQ:CRWD) stock are going to have to wait a few weeks for fourth quarter and fiscal year 2022 results. Those results will be available on March 9.
Preliminary indications are that CrowdStrike should fare very well. But that’s not actually the most important question investors have to answer in regard to the cloud security giant. The more pertinent question is whether the recent market correction in CrowdStrike is over.
That’s what investors are attempting to figure out right now: In other words, did CRWD stock reach a discernible bottom? If the answer is “yes,” then it’s a clear buy. On the other hand, if the fire sale in growth stocks is to continue then CrowdStrike has much farther to fall.
Fundamentally Sound
Again, the question surrounding CrowdStrike has little to do with its business. CrowdStrike proved that it has a lot of strength and appeal with its third quarter earnings back in early December.
Investors who look into CrowdStrike will immediately notice the importance of annual recurring revenue (ARR) to the firm. CEO George Kurtz was quick to denote ARR as well, stating:
CrowdStrike delivered a robust third quarter with broad-based strength across multiple areas of the business leading to net new ARR growth accelerating and ending ARR growing 67% year-over-year to surpass the $1.5 billion milestone. Our outstanding results this quarter demonstrate the flywheel effect of our platform and reflect continued strong customer adoption for our core products in addition to the growing success of our newer product initiatives including identity protection, log management and cloud.
ARR’s Importance to CRWD Stock
ARR is particularly important to CrowdStrike because it implies several things. Recurring revenue is that which comes from the same customers. In order to maintain recurring revenues a company has to develop tight relationships. CrowdStrike’s increasing ARR signals that its customers are highly satisfied. Further, recurring revenue creates predictable cash flows. Those predictable cash flows are very attractive to investors.
Increasing ARR also means that CrowdStrike has to spend fewer dollars toward acquiring new customers. That frees up marketing capital to be leveraged in other areas of its business. In short, CRWD stock appears very strong by a few select metrics.
But that isn’t the most important question to answer in relation to CrowdStrike. That question is whether it falls farther or rebounds after a tough period that began in early November.
Hampered by Growth
CrowdStrike provides its services and products as endpoint security protection, especially for enterprise customers. This is an increasingly important industry as ransomware and cybersecurity threats continue to rise. CrowdStrike has a strong position within the industry.
The question is about whether CrowdStrike, as a growth stock, makes sense right now. Through the first nine months of 2021 CrowdStrike’s revenues increased 67%. That’s very attractive when growth stocks are cyclically strong. But with interest rates set to rise on inflation woes CrowdStrike and all growth stocks are suffering.
So it isn’t the 67% revenue that investors are suddenly interested in. Rather, it’s the company’s rapidly mounting losses. CrowdStrike’s net losses reached $190.64 million through the first nine months of 2021. That was a significant increase over the $73.63 million net loss a year prior.
Investors are struggling with which metric to focus on. Will the market come around soon on growth stocks, which would be positive. Or will the market view it as a non-value stock, which isn’t a positive for it.
What to Do With CRWD Stock
Wall Street pulled back its target prices on CRWD stock at the end of the year. But those target prices were still at $330 and $255 from Mizuho and JPMorgan (NYSE:JPM), respectively.
I believe that the market will come around on CrowdStrike again. It could fall further, but it’s hard to see why it should trade below current levels for an extended period of time.
On the date of publication, Alex Sirois 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.
