CrowdStrike Just CRUSHED PaloAlto's Narrative | Here's What It Means | $CRWD Earnings Analysis

Summary

The video script analyzes CrowdStrike's impressive fourth-quarter earnings report, which defied the industry concerns raised by Palo Alto Networks. Despite Palo Alto's warnings of pricing pressures, CrowdStrike showcased robust growth, with a 33% increase in revenue, doubling of earnings per share, and expanding margins. The company's subscription revenue and multi-product adoption solidified its platform strength and competitive advantage. While acknowledging CrowdStrike's lofty valuation, the analysis suggests the company's execution and potential for continued growth make its current pricing justifiable, provided it maintains its trajectory.

Takeaways

• 😄 CrowdStrike reported impressive Q4 earnings, with 33% revenue growth, strong margins, positive cash flow, and profitability on a non-GAAP basis.
• 🚀 CrowdStrike categorically denied industry-wide pricing and competitive pressures, contrary to Palo Alto Networks' claims.
• 🔐 The company is seeing increased adoption of its multi-product platform, with customers using more of its security solutions.
• 📈 Subscription revenue grew 33% year-over-year, with gross margins plateauing near 40% growth.
• 🤝 CrowdStrike's dollar-based net retention rate of 119% indicates strong customer retention and expansion.
• 💰 Management expects around 30% top-line growth for the current quarter and $4 billion in sales for the full year.
• 🔎 Key metrics to watch include multi-product usage, new customers, net new ARR, and free cash flow.
• 🧮 The stock's valuation appears expensive based on traditional metrics but could be justified if CrowdStrike achieves its target free cash flow margins.
• 📊 A reverse discounted cash flow model suggests CrowdStrike needs to grow free cash flow by around 25% annually for 10 years to justify the current stock price.
• 🚀 CrowdStrike's execution and growth potential, coupled with new product traction, suggest the stock's valuation may not be as expensive as it appears.

Q & A

What were the key financial highlights from CrowdStrike's Q4 FY2024 earnings report?

CrowdStrike reported revenue growth of 33% to $845 million, beating estimates. Non-GAAP EPS was $0.95, more than double from the previous year. Gross margins expanded by nearly 300 basis points, while operating margins reached over 25% and net margins approached 30%.

How did CrowdStrike address concerns about pricing and competitive pressures raised by Palo Alto Networks?

CrowdStrike categorically denied facing industry-wide pricing and competitive pressures. The company stated that it is not cutting prices or giving away products for free, as it has built its platform from the ground up.

What evidence did CrowdStrike provide to demonstrate its platform's success?

The number of customers using at least five of CrowdStrike's tools increased by 30% year-over-year, while those using six or more tools grew by 39%, and those using seven or more tools increased by 55%. Additionally, the number of customers using eight or more tools more than doubled.

How did CrowdStrike's management guide for the upcoming quarter and fiscal year?

For the current quarter, management expects around 30% top-line growth, slightly ahead of Wall Street estimates. For the full fiscal year, management guided for about $4 billion in sales, also slightly ahead of analyst expectations.

What key metrics should investors watch for CrowdStrike moving forward?

Investors should keep an eye on the multi-product usage numbers, new customer growth, net new annual recurring revenue (ARR), and free cash flow generation.

How did the analyst evaluate CrowdStrike's valuation?

The analyst used a reverse discounted cash flow model, inputting CrowdStrike's trailing 12-month free cash flow of $938 million and a terminal growth rate of 3%. To justify the current stock price, CrowdStrike would need to grow its free cash flow at 28-29% annually for 10 years.

What is the analyst's overall assessment of CrowdStrike's prospects?

While acknowledging that CrowdStrike's stock is not cheap at current prices, the analyst believes it's possible that the company is not as expensive as it seems, given its potential to reach 38% free cash flow margins and continue executing well.

How does CrowdStrike's performance compare to Palo Alto Networks' concerns about the cybersecurity industry?

CrowdStrike's strong financial results and platform success stand in contrast to Palo Alto Networks' warnings about pricing and competitive pressures in the cybersecurity industry.

What role does CrowdStrike's platform play in its competitive advantage?

CrowdStrike's platform approach, which allows customers to consolidate multiple cybersecurity solutions under one vendor, creates switching costs and a data network effect, forming a competitive moat for the company.

How does the analyst view CrowdStrike's growth stage and potential for operating leverage?

The analyst sees CrowdStrike as being in stage four of growth, where the focus will shift towards operating leverage, although that is not expected to kick in until the second half of the next fiscal year.

Outlines

00:00

📈 CrowdStrike's Q4 2024 Earnings Outperform Amid Cybersecurity Industry Concerns

The video discusses CrowdStrike's stellar Q4 2024 earnings report, which defied concerns about the cybersecurity industry raised by Palo Alto Networks' disappointing outlook. CrowdStrike reported a 33% year-over-year revenue growth, beating estimates, and strong profitability with expanding gross and operating margins. Key highlights include positive free cash flow, a robust balance sheet, multi-product adoption among customers, and a strong net retention rate of 119%, indicating customer loyalty and expansion.

05:02

🔍 Digging Into CrowdStrike's Key Performance Indicators

The video dives into CrowdStrike's key performance indicators (KPIs) using Fin Chat, a tool that provides insights not readily available elsewhere. The KPIs discussed include subscription revenue growth, gross margins for subscription products, and dollar-based net retention rate. These metrics showcase CrowdStrike's ability to maintain strong growth rates, high profitability, and customer retention/expansion, reinforcing the company's competitive advantages and platform-centric approach.

10:03

📊 Evaluating CrowdStrike's Valuation and Future Growth Prospects

The video explores CrowdStrike's valuation and future growth prospects. Traditional valuation metrics like price-to-earnings and price-to-free-cash-flow suggest an expensive valuation. However, a reverse discounted cash flow analysis shows that if CrowdStrike can maintain a 25% annual free cash flow growth rate for the next 10 years, reaching its targeted 38% free cash flow margin, the current valuation may be justified. The video acknowledges the high bar for growth but remains optimistic given CrowdStrike's execution, new product traction, and plateauing growth rates.

Keywords

💡Earnings

Earnings refer to the profits or net income generated by a company over a specific period, typically a quarter or a fiscal year. In the video, the earnings reports of cybersecurity companies like Palo Alto Networks and CrowdStrike are discussed, highlighting the importance of these financial results in assessing a company's performance and future outlook. The disappointing earnings and outlook from Palo Alto Networks initially weighed on the entire cybersecurity industry, while CrowdStrike's strong earnings report and positive guidance helped alleviate those concerns.

💡Outlook

A company's outlook refers to its projections or guidance for future performance, typically in terms of revenue, earnings, or other key metrics. In the video, Palo Alto Networks' disappointing outlook, which mentioned pricing and competitive pressures, initially dragged down the cybersecurity industry. In contrast, CrowdStrike's positive outlook, with management providing guidance for continued growth, was well-received by investors, as evidenced by the stock's significant price increase.

💡Cybersecurity

Cybersecurity refers to the practice of protecting computer systems, networks, and data from unauthorized access, theft, or damage. The video focuses on companies operating in the cybersecurity industry, such as Palo Alto Networks and CrowdStrike, which provide various cybersecurity solutions to businesses and organizations. The importance of cybersecurity in today's digital landscape is highlighted, as companies strive to stay ahead of evolving cyber threats and maintain secure environments for their operations and data.

💡Revenue

Revenue is the total amount of income generated by a company from the sale of its products or services over a specific period. In the video, CrowdStrike's revenue growth of 33% year-over-year is highlighted as a positive indicator of the company's performance. Revenue growth is a crucial metric for investors, as it reflects a company's ability to expand its customer base, increase sales, and drive overall business growth.

💡Margins

Margins refer to the profitability levels of a company's operations, typically expressed as a percentage of revenue. In the video, CrowdStrike's expanding gross margins (up 300 basis points), operating margins (over 25%), and net margins (closing in on 30%) are discussed as favorable indicators of the company's financial health and operational efficiency. Higher margins suggest that CrowdStrike is able to generate more profits from its revenue while effectively managing costs.

💡Free Cash Flow

Free cash flow (FCF) is the amount of cash a company generates after accounting for operating expenses and capital expenditures. In the video, CrowdStrike's positive free cash flow and its significance as a key metric for valuation are discussed. Free cash flow is important because it represents the cash available for reinvestment in the business, debt repayment, or distribution to shareholders. A company with strong and growing free cash flow is generally viewed positively by investors.

💡Subscription Revenue

Subscription revenue refers to the recurring revenue generated by a company from customers who pay a recurring fee, typically on a monthly or annual basis, for access to products or services. In the video, CrowdStrike's subscription revenue growth of 33% year-over-year is highlighted as a positive sign, indicating that the company is successfully retaining and expanding its customer base for its subscription-based cybersecurity solutions. Subscription revenue is a key metric for software and service-based companies, as it provides a predictable and recurring revenue stream.

💡Dollar-Based Net Retention Rate

The dollar-based net retention rate (DBNRR) is a metric used to measure a company's ability to retain and expand its existing customer base. It takes into account not only customer churn but also the expansion or contraction of revenue from existing customers. In the video, CrowdStrike's DBNRR of 119% is highlighted, indicating that the company not only retained its existing customers but also expanded their spending by an average of 19% year-over-year. A high DBNRR is a positive signal for investors, as it demonstrates a company's ability to retain and upsell its customer base.

💡Multi-Product Usage

Multi-product usage refers to the adoption of multiple products or services by a single customer. In the video, CrowdStrike's increasing multi-product usage among its customers is discussed as a key metric to watch. The higher the number of customers using five, six, or more of CrowdStrike's cybersecurity solutions, the stronger the company's customer lock-in and potential for cross-selling additional products. Multi-product usage can also indicate the effectiveness of CrowdStrike's platform strategy, where customers benefit from integrating multiple solutions within the same ecosystem.

💡Valuation

Valuation refers to the process of determining the current worth or fair market value of an asset, such as a company's stock. In the video, different valuation metrics, including price-to-earnings (P/E), price-to-free cash flow (P/FCF), and a reverse discounted cash flow model, are discussed to assess CrowdStrike's valuation and determine whether the stock is overvalued or undervalued. Valuation is crucial for investors to make informed investment decisions and is often based on a combination of financial metrics, growth prospects, and market expectations.

Highlights

CrowdStrike categorically denied the pricing and competitive pressures faced by Palo Alto Networks, going point by point to show how that wasn't the case in the industry.

CrowdStrike's revenue grew by 33% year-over-year, beating both management's guidance and Wall Street's estimates.

CrowdStrike reported non-GAAP earnings per share of $0.95, more than double from the previous year and ahead of guidance.

CrowdStrike's gross margins expanded by almost 300 basis points, operating margins exploded to over 25%, and net margins are closing in on 30% on a non-GAAP basis.

CrowdStrike reported positive free cash flow, and the company became non-GAAP profitable for all of the previous four quarters.

CrowdStrike's balance sheet is in great shape with about $3.5 billion in cash and a little under $1 billion in debt.

CrowdStrike's subscription revenue grew by 33% year-over-year, and the growth rate is plateauing above 30%, a very good sign.

CrowdStrike's gross margins for subscription products grew by 38%, plateauing near 40% growth.

CrowdStrike reported a dollar-based net retention rate of 119%, meaning existing customers spent 19% more on average.

The number of CrowdStrike customers using at least five of its tools was up 30% year-over-year, six or more tools up 39%, and seven or more tools up 55%.

CrowdStrike is becoming an umbrella for companies to get the majority of their cybersecurity needs, with no lag from platformization.

CrowdStrike management expects about 30% top-line growth in the current quarter and about $4 billion in sales for the full year, slightly ahead of Wall Street estimates.

Key metrics to watch for CrowdStrike moving forward are multi-product usage, new customers, net new ARR, and free cash flow.

CrowdStrike's moat is widening, and the thesis is very much on track, but the question is whether the stock is getting pricey.

A reverse discounted cash flow model suggests CrowdStrike needs to grow its free cash flow by around 25% per year for 10 years to justify its current valuation, a high bar but potentially achievable given its current performance and growth trajectory.

Transcripts

two weeks ago Palo Alto networks came

out with earnings and its Outlook was

very disappointing with the company

talking about how there were pricing and

competitive pressures that were Weighing

on things and it dragged the entire

cyber security industry down and I

actually made a video on that which you

can see right here I've linked that in

the show notes below so crowd strike the

leader in especially endpoint security

but a number of other areas of cyber

security as well came out with earnings

today

and it categorically denied that this is

the case industrywide by going Point by

point and showing how that wasn't the

case and the industry I'm sorry and

investors love it with shares up over

20% as of this writing so what does this

mean for shareholders and the stock

let's spend the next 10 minutes trying

to figure that out my name is Brian

stoel as the time of this recording

crowd strike is going to be my number

one holding and want to give a shout out

to fin chat. for sponsoring today's

video more from them in just a minute so

this was crowd strike's fourth quarter

fiscal 2024 after tomorrow's open it'll

be in the ballpark of an 86 billion

company on the top line revenue was up

33% to 845 million that beat both

Management's guidance and wall Street's

estimates on a non-gaap basis earnings

per share of 95 cents was more than

double from last year and ahead of

managements and wall Street's guidance

looking at margins on a non-gaap basis

there was a lot to like gross margins

expanded by almost 300 basis points

operating margins exploded to over 25%

and net margins are closing in on 30%

again all on a non-gaap basis which does

not include stock based compensation

free cash flow continues to be positive

the company Net Income went up it is

worth noting they were also uh

profitable on a non-gaap basis for all

of the previous four quarters as well

the balance sheet is in great shape with

about three and a half billion in cash

and a little under 1 billion in debt so

nothing to worry about there let's go

down the income statement just to get a

lay of the land here now this is all on

a gap basis so it won't reflect the same

exact Dynamics but they're pretty close

total revenue up

33% the cost of that Revenue only up 19%

when the cost of your Revenue grows

slower than your Revenue that's great it

means your gross profit grows even

faster In Crowd strikes case up 38% and

it's also worth noting that operating

expenses including all of this

stock-based compensation was only up 16%

so 33% growth on the top line 38% growth

in gross profit and only 16% growth in

the operating expenses that's what led

the company to go from A Loss to a

profit uh in terms of operating income

now this does come at a cost that should

not be overlooked and that is uh

dilution the weighted average number of

diluted shares outstanding was up 5.4%

from the same time last year so that is

worth keeping an eye on but what else

happened during this quarter well for

that we're going to head on over to fin

chat. now crowd strike just came

finished their conference call less than

half an hour ago I'm going to go on over

to Fin chat. and show you how the most

most important figures which you can't

find anywhere else are already there if

you'd like to you can try it for free

but if you'd like to get a subscription

that has all the functionality I'm about

to show you click the link on the show

notes below and you'll get a 25% off

discount so I head on over to Fin chat.

and I type in our ticker symbol crwd

when I do I click on that and the tab

that is most useful for me is this one

right here segments and kpis because

these are stats that you're not going to

find anywhere else there's a couple that

I really want to focus on okay the first

subscription Revenue because that's what

this is all about subscription Revenue

continues to grow very nicely from about

2.1 billion to 2.9 billion and that's on

an annual basis we can also look at it

on a quarterly basis and we can also

look at the growth rates and by doing

that I can just click right here so what

we see is obviously it makes sense that

the growth has to slow over time in this

case uh subscription Revenue grew 33%

year-over-year for this quarter that's

the blue line right here the key is is

trying to make this slow down as slow as

possible and if you look at the last

three quarters it is really tailing out

and to start plateauing at above 30% is

a very good sign what if we look at

gross margins for subscription products

because because again gross profit is

what really counts here on the

subscription products if we look at

gross profit what we see again is that

growth remains awesome 38% growth which

we already covered in gross profit and

again we're plateauing at near 40%

growth now it won't stay that way

forever because it can't no company can

keep up those growth rates forever but

the fact that it's plateauing here is an

incredibly good sign one last one that I

want to just talk about real quick is

dollar ba dollar based net retention

we're going to look at that on an

annualized basis because right now the

company is only uh reporting that on an

annualized basis this one hasn't been

filled in yet but the company reported

it was

119% in other words crowd strike not

only held on to all of their customers

that they had last year at this point on

average even after you've got ch

but it got those existing customers to

spend 19% more per year so if they

didn't add any new customers they still

had 19% growth in revenue and not only

that but looking forward management said

that it should continue to be a

percentage or two point above or below

120% so this is a dynamic that's not

going anywhere anytime soon so that's

what you can get on finch. now there is

one other stat that I like to call out

because something that I track these

days management only provides it

annually but since this was the end of

the fourth quarter we have it they give

us the total number of customers and

then they give us the percentage of

those customers that use four or more

five or more six or more seven or more

of crowd strike's modules now this

matters for two reasons one it is proof

that crowd strike has optionality which

is the ability to create new products

that the market wants that's like

offense but also proves that crowd

strike has a moat because the more of

these solutions that a company uses the

easier their life becomes in dealing

with just one vendor and then we've got

a moot of not only switching costs but

in the cyber security realm because that

data is shared a network effect of data

and that is really important because

what we heard on the call over and over

again is that while Pao elto was talking

about platforma tization about how they

needed to cut prices and give products

away for free in order to get customers

to transition to their platform crowd

strike is saying we're getting huge

deals and we're not cutting prices at

all because we've built this as a

platform from day one here's the proof

the number of customers that are using

at least five of crowd strike's tools

was up 30% from the same time last year

the number using six or more was up 39%

the number using seven or more more was

up 55% and while we don't actually have

the number management did say the number

of customers using eight or more more

than doubled it is becoming an umbrella

that a company can go to to get the

majority of their cyber security needs

there is no lag from platforma tization

with crowd strike it is a growth

catalyst so what does management see

looking forward now did caution that

it's taking a somewhat conserv stance it

also let us know that it is going to be

hiring aggressively in the year ahead

but in the current quarter management

sees about 30% Top Line growth slightly

ahead of what Wall Street was estimating

and for the full year management sees

about $4 billion in sales slightly ahead

of what Wall Street was estimating so

with all this good news the question

then becomes what should we watch moving

forward well first look at that

multi-product usage now they don't give

us the total number of customers that

they have on a quarterly basis anymore

but they do provide if you read the

notes the percentage of customers with

five six seven and I bet soon eight plus

products also keep an eye on the new

areas that they're getting into like

identity I didn't call that out here but

they have new products that are really

taking off so keep an eye on that number

two new customers that's something we're

going to have to look for on an annual

basis but it still matters because those

customers are coming because they have a

One-Stop shop now for their cyber

security needs number three Net new AR

because the net new AR in this quarter

was a record and I want to keep an eye

on that number four free cash flow now

the company had about 938 million in

free cash flow now over the prior year

that was good for a 30.7 free cash flow

margin there is no doubt that the moat

is widening around this company and the

thesis is very much on track but look as

of tomorrow this is going to be my

number one holding it's not hard to see

why it does very well on my antifragile

frame workor but the question becomes is

this getting a little bit pricey now

well first we got to say well what stage

of of growth is this company in I think

they're in about stage four where

they're really going to focus on

operating leverage although even that's

not going to kick in till the second

half of next year so to look at

valuation again let's head back to fin

chat. now we can look at traditional

metrics like Gap priced earnings and

that's useless because on a gap basis

the company just became Gap profitable

but what if we look about forward priced

earnings well if we do that we've got a

company trading for about 90 times

forward earnings that's really expensive

but also not the greatest way to look at

it what if we look at price to free cash

flow oo still very expensive in the 80s

what if we look at forward price to free

cash flow well then it's a little bit

more reasonable at about 70 times

forward free cash flow but again that's

still really price

I would argue that the best way we can

do for a company that still has lots of

operating leverage ahead of it is a

reverse discounted cash flow model now

here's how this works you can get a copy

of this calculator in the show notes

below for free but what you do is you

input the ticker symbol

crwd now you input the free cash flow

over the trailing 12 months which was

938 million now in general I give a

terminal growth rate of 3% a discount

rate of 10% mean means I want Market

matching results over the next 10 years

now the stock is actually trading for

370 because this has all happened after

the market Clos it's got where it closed

at but what you got to do now is make

this growth rate increase until it gets

to about

370 so I can put that in and I can put

in about 27

28

29 wow all right so we're talking about

28 to 29% growth every year in free cash

flow for 10 years to justify today's

price make it a market matching result

now that seems crazy expensive crazy

expensive type of expensive where I'd be

like well maybe I do need to trim this

because after tomorrow this might be 12

13 14% of my

portfolio but it's worth pointing out

that management has made very clear that

it believes that it can have free cash

FL margins of 38% at a mature estate

well if you have 38% free cash flow

margins let's assume that you have that

today well then you would have about

1,200 $1.2 billion in free cash flow

maybe a little bit less but right in

that ballpark well if you had $1.2

billion dollar in free cash flow today

because you're already optimized for

that free cash flow margin well then how

fast you have to grow and here we get

about 24 25 about

25% so what does this all mean what it

means is that if crowd strike can reach

38% free cash flow margins by

2034 then it needs to grow its top line

by

25% per year for 10 years moving forward

that is a high bar but to that I think

that there's two things to remember

management is calling for growth of 29%

in in the in the current year and we

know that they've repeatedly beat those

estimates so let's say that they grow 30

31% we've also seen that that has been

plateauing we're not talking about a

company that is going like 70% growth

50% growth 30% growth 10% growth that's

not what we're talking about it's it's

it's it's at a much slower Plateau right

now and we're seeing these new products

like identity management really getting

traction with customers so my point is

is that while the I would never call

this stock cheap at its current prices I

also think it's entirely possible that

it's not quite as expensive as people

think don't get me wrong crowd strike

has to continue executing but based on

the information that we have I I see no

reason why they couldn't doesn't mean

that they can't slip up but they're

doing very very well now I'm not gonna

be getting any shares because it's

already a huge percentage of my

portfolio but if you want to follow

along and know what the most important

things to follow are click on that link

for fin chat. get 25% off let me know

what you think in the comment section

below and is this something where you

think crowd strike is clearly proven

that it is immune from the type of

things that Palo Alto talked about or is

this kind of oneoff in nature we'll

check back in on 90 days on this one

until that time comes Brian out