00:00 CrowdStrike just reported Q1 numbers and the markets response was, well, not great. Shares
00:05 are down 11% after hours but it's not obvious why. On its face the report looked good, revenue
00:11 was up 42% to $693 million, annual recurring revenue was also up 42%, gross margin increased
00:19 1% and the company generated $227 million in free cash flow. Looking at the bigger picture
00:25 that means CrowdStrike has generated $2.4 billion of revenue over the last 12 months,
00:31 $782 million of free cash flow but net income was negative at -$151 million. The enterprise
00:38 value is just under $31 billion so the company is now valued at 13 times revenue and 40 times
00:44 free cash flow. CrowdStrike also released strong guidance for the rest of the year with
00:49 revenues forecast to come in at $3 billion. So why is the stock down? Perhaps the main
00:54 reason is that the company is still not showing positive net income. The company is guiding
00:58 for $580 million of non-GAP net income for the rest of the year but a lot of that gets
01:03 eaten up by stock based compensation. More generally CrowdStrike is an expensive stock,
01:09 it trades at 57 times adjusted net income and 13 times revenue. When expectations are
01:15 so high it's easy for earnings to disappoint investors. And although CrowdStrike continues
01:20 to grow, it's revenue growth rate has dropped every year now since it went public. Considering
01:26 this year's growth is expected to come in around 36%, the analysts forecast for above
01:31 30% growth for the next few years now looks optimistic. So let's consider one hypothetical
01:37 scenario where CrowdStrike hits $3 billion in revenue this year and then compounds at
01:41 25% growth for the 4 years after that. That would put revenues at $7.3 billion and a 20%
01:48 net margin puts net income at around $1.5 billion in 5 years time. Apply a 35 times
01:55 multiple to that figure gets us to a market cap of $51 billion which works out to an investment
02:00 return of 9% per year and that's quite an aggressive scenario. So you can see that CrowdStrike
02:06 is still rather expensive even after the 11% drop in share price. To get a better investment
02:12 return CrowdStrike needs to grow faster than 25% per year or increase its net income margin
02:18 to over 20%. CrowdStrike could do that because it's a quality business but so much growth
02:23 is priced in it doesn't leave any margin of safety. For that reason I give the stock
02:28 a neutral rating but these are my personal opinions and I've got no position in the
Comments