3 Reasons You May Consider Selling Your Shares Of CrowdStrike (NASDAQ:CRWD)

Look, we get it.

CrowdStrike (NASDAQ:CRWD) has a lot of fans out there, us among them. The stock has been on fire over the last year or so, gaining more than 160% in a relatively short space of time, and the stock is now almost completely back to all-time highs, something that very few tech firms that had their share prices collapse following 2021 can claim:

Aside from the chart, the underlying business has performed well too. Revenues have continued their march higher, with ARR recently crossing $3 billion, and operating income coming in positive for the first time ever last quarter.

It appears that the fun isn’t over. Management recently came out and said that a strong Q4 is in the pipeline, and the focus remains on achieving 10 billion in ARR over the long term:

We delivered a record Q3, accelerating double-digit net new ARR growth, record free cash flow and record profitability. Surpassing $3 billion of ARR as the fastest and only pure-play cybersecurity software vendor in history to achieve this milestone validates CrowdStrike’s market leadership. Our Q4 setup is strong with a record pipeline, and the competitive gap between CrowdStrike and other players in the market continues to widen. I’m excited about the path we are on and the progress we are making to $10 billion in ARR.

This was mentioned in addition to a litany of new product advances, like Falcon for IT, which focuses on preventing breaches and consolidating legacy solutions for businesses and other organizations.

However, despite all of the progress that CRWD has made over the last few quarters, there are some equally important red flags that investors should consider before diving into the stock whole-hog.

Today, we’ll outline these risks and make the case that you should trim your stake in the hyper-growth cybersecurity company and wait for a better entry point at a lower price.

Sound good? Alright, let’s take a look at the top 3 reasons that you should consider cutting your position (or wait to invest fresh capital) in CrowdStrike.

1.) Slowing Growth

CrowdStrike is growing like a weed, which is completely undisputed. Just look at how systematically this TTM sales chart grows – it’s transfixing:

Quarter after quarter, more sales roll in from the company’s increasingly impressive product suite, which now also includes Charlotte AI, a new AI model that’s being used to streamline cybersecurity workflows; a nice addition to an already best-in-class offering.

At first glance, revenue seems to be accelerating, as the curve appears exponential, bowing in as it increases up and to the right.

However, YoY sales math works by dividing by the previous year’s revenue base, and on this metric, despite the nominal increases in revenue, revenue growth is actually slowing:

Since 2021, year-over-year revenue growth has slowed from 70% to less than 36%, and the trend isn’t abating. Every single quarter, one after the next, revenue growth slows.

This isn’t necessarily an issue as many companies will counter slowing revenue growth by attempting to increase margins. However, on a gross basis, the same dynamic is at play – things are slowing down big time. On a net basis, the company has only just begun earning any money and still has massively negative retained earnings following several years of operating in the red.

This matters primarily because high-growth companies typically demand hefty premiums from the market, which is something we’ll discuss in point number 2. When growth slows like this, it can become harder and harder for companies to keep up with expectations, and one day, typically things snap, and the valuation gets cut in a nasty way.

Speaking of valuation…

2.) The Extreme Valuation

There are ‘pricey’ companies, and there is CrowdStrike.

Currently rated a “D-” in Valuation by Seeking Alpha’s Quant Rating System, CrowdStrike’s stock is wildly, hopelessly, expensive:

Trading at a forward P/E ratio of 1,080x, the company’s recent, small level of profitability appears to be throwing off some of the metrics somewhat. However, on a sales basis, things still look very, very rich.

Trading at a 23x price to sales, CrowdStrike is the most expensive company we have covered on Seeking Alpha. It’s also the second most expensive publicly listed company in the United States (with over $20 billion in market cap) on this metric, only trailing NVIDIA (NVDA), which holds the top spot:

Even when compared with a tech sector peer group that has a similar level of YoY revenue growth…

CrowdStrike manages to be the most expensive company by far, with a premium to the average sales multiple, at 15.6x, of more than 51%:

This level of valuation is obviously due to the company’s strong results and high-quality, systematic, top line growth, as we’ve discussed. However, buying the stock here, or adding to an existing position, appears to be a poorly-timed endeavor.

We anticipate that the multiple will, at best, remain stable here, or drop somewhat, which could cause losses to investors. In the current market environment, there just doesn’t seem to be the appetite among investors to pay much above the 20x sales mark for companies – even the exceptional ones.

Taken together, at the same time that top line growth is slowing, the company appears to only be getting more and more expensive. This is clearly a mismatch, which may cause investors, who have been riding the momentum up until this point, some losses.

Speaking of momentum…

3.) The Chart

The third and final key risk to CrowdStrike at this juncture has to do with how the stock has behaved on a technical basis. Now, we aren’t fans of using technical analysis on its own to analyze the markets. Using a technical-only setup can lead to a lack of context, which can lead to significant losses.

However, when combined with the other risks, it seems relevant to raise here.

First off, on a momentum basis, CrowdStrike looks extremely ‘overbought’:

With an RSI of 78, and trading at a relatively far 10% premium to average medium-term average pricing, CRWD’s stock has mathematically extended well beyond its mean.

Additionally, CRWD shares are also scraping the top of the short-term linear regression’s standard deviation band, while trading outside of the medium- and long-term bands, which indicates extreme, persistent, extension outside of the norm. This can most easily be read by non-chart folks as “extreme enthusiasm”.

And enthusiasm, along with all things in the markets, is cyclical.

One final point here of note has to do with CRWD’s ADX reading. The ADX, for those unaware, is an indicator that measures the level of persistent trend in a stock over time. The higher the number, the stronger the trend.

In most cases, a reading under 20 is considered ‘trendless’, a reading between 20 and 30 is considered ‘mild’, and a reading above 30 is typically considered ‘relatively strong’. Recently, CRWD’s ADX reached an all-time high for the stock at ~60, before coming back into a still-extended reading of 44:

This indicates the strength of the trend that CRWD has experienced in 2023.

The other key thing to know about ADX is that it typically means reverting, which means that bouts of an extreme can be followed by bouts of another extreme. In this case, that doesn’t mean that the stock will crash, or anything. However, when taken together with the valuation concerns and strong momentum in the present market, it appears that the trend is about as extended as possible for the time being.

That is usually the best time to take profit.

Summary

So, there you have it – our 3 key reasons why you should seriously consider trimming your stake (or waiting to invest fresh capital) into CRWD at the current moment in time.

The company is still great from a fundamental standpoint – it continues to grow rapidly, introduce new products, and it appears to be turning the corner on profitability.

However, the stock’s extremely overbought nature, expensive valuation, and slowing growth trajectory should give investors pause, until they see seriously continued progress on all fronts.

Thus, we rate CRWD a “Hold”, until things improve.

Cheers!