CrowdStrike

CrowdStrike recently delivered strong results and raised its guidance, but its shares ultimately sold off on the back of its Q2 2020 results.

Are investors starting to finally discern which stocks might be overvalued? It's too soon to say, but one thing we can be sure of is that despite a compelling narrative, CrowdStrike is vastly overvalued and investors should avoid it for now.

Rapid Growth, but Is It Stable?

CrowdStrike (CRWD) has a very attractive business model which leverages its open-sourced Falcon platform to support cloud-native customers through a combination of AI and behavioral pattern-matching techniques to stop breaches.

CrowdStrike's mission is to reinvent security for the cloud era. As the graph above demonstrates, CrowdStrike certainly is growing its top-line at a breakneck pace, firmly vindicating its vision.

The problem for shareholders is to consider whether a company that was growing its top-line at close to 110% year-over-year last year, and looking out on its full-year 2020 guidance, is now decelerating to approximately 80% revenue growth rates, is it likely to decelerate further next year? That is undoubtedly a critical question, and the answer to which, is guesswork.

Further confounding issues for its shareholders is the fact that CrowdStrike's CEO George Kurtz declares that by 2021 the security cloud total addressable market should reach $29 billion. However, as it stands now even after the recent sell-off, CrowdStrike's market cap is roughly 50% of its future total addressable market, which reinforces the difficulty of arguing that CrowdStrike has a lot of upside left in its shares.

Further Down The Road Potential?

CrowdStrike points to its single agent architecture as its key differentiator from that of its competitors. Kurtz declares that not only is the industry growing fast but that CrowdStrike's simplified solutions are allowing CrowdStrike's growth rates to continue to outpace that of its peers.

Moreover, one metric through which CrowdStrikes measures its own success is its total subscription customers that are adopting four or more cloud modules. These figures have grown from just 30% in 2018 to as much as 50% in this most recent quarter.

CrowdStrike continues to echo its previous message -- that its determination to invest in the next generation of innovations to solve the most pressing security and IT challenges work as a virtuous cycle. The argument is that continuously adding to its competitive advantage will allow CrowdStrike to rapidly grow for the foreseeable future.

Nosebleed Valuation with no Margin Of Safety

Carbon Black was acquired by VMware (VMW) for approximately eight times trailing sales. Admittedly, Carbon Black's top line is growing somewhere in the ballpark of 20%, which is significantly slower than CrowdStrike. Having said that, it does point to a rough figure for where a knowledgeable buyer would acquire a company to get exposure to the cybersecurity space.

Next, BlackBerry's Cylance specializes in AI-cybersecurity to help enterprises connect, protect and secure endpoint data. BlackBerry's Cylance had been growing at 90% throughout full year 2018, but its latest full-year guidance is now pointing towards 25% to 30% year-over-year gains, a marked slowdown. And as the table above shows, it is also being more reasonably valued, even if one is looking at Blackberry as a whole. 

However one appraises a potential investment in CrowdStrike, it is difficult to come up with an argument for why CrowdStrike being priced at 50x trailing revenues offers new shareholders any upside potential.

The Bottom Line

The cloud-based cybersecurity company is making many correct moves. The problem for investors is that too much of its potential has already been priced in. For now, investors are better off sidestepping this investment and deploying their hard-earned capital on different opportunities instead.