Is CrowdStrike Stock a Buy After Falling 17% Year to Date?

But despite CrowdStrike’s strong cash generation and its impressive top-line momentum, there’s one glaring problem with the bull case for the stock at its current valuation: CrowdStrike remains unprofitable on a generally accepted accounting principles (GAAP) basis. CrowdStrike still reported a loss from operations of $69 million in fiscal Q3.

For a company with a market capitalization of about $98 billion, it’s concerning that it still isn’t reporting consistent, meaningful profits.

The valuation is asking for near-perfection from here. Even after the sell-off, CrowdStrike is still valued like a business that can profitably compound at a high rate for a long time with limited setbacks. Even its price-to-sales ratio of 21 is quite extreme for a software company. At a multiple like that, investors are not just paying for continued revenue growth. They are paying for sustained strength in net new ARR, a steady gross margin, and sufficient operating leverage to help CrowdStrike’s bottom line swing to substantial positive levels.

To the company’s credit, there are some huge positives to its economic model. CrowdStrike’s GAAP subscription gross margin was 78% in fiscal Q3, and free cash flow is robust. If the company can maintain these characteristics years after its bottom line turns positive, the security company’s valuation could work.

The risk is that cybersecurity is both crowded and increasingly sold in bundles. When a security tool becomes part of a broader platform deal, sold by deep-pocketed tech giants, pure-play cybersecurity companies may be pressured on price over time.

Then, of course, there’s execution risk, which CrowdStrike investors are already familiar with. The company has incurred significant incident-related costs associated with the July 19, 2024, Falcon sensor update. And those kinds of situations can create both direct costs and indirect friction in sales conversations.

So, is this a buying opportunity?

I would avoid buying shares here. The fundamentals are solid, but the valuation simply doesn’t leave enough room for any slip-ups or an environment that becomes more competitive over time.

If the stock keeps falling or if CrowdStrike can keep delivering elevated net-new ARR while swinging to substantial profitability, I would consider changing my mind.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.

Is CrowdStrike Stock a Buy After Falling 17% Year to Date? was originally published by The Motley Fool