CrowdStrike Holdings (CRWD 2.56%) stock enjoyed a terrific run on the market in the past six months, but the cybersecurity specialist got a reality check following the release of its fiscal 2025 fourth-quarter earnings report (for the three months ended Jan. 31) on March 4.
Shares of the company were down more than 6% the following day on account of its weaker-than-expected guidance. And they continued dropping as stocks sold off in recent days. Let's see why CrowdStrike's guidance failed to pass muster and check if its recent pullback could be a buying opportunity for investors.
NASDAQ: CRWD
Key Data Points
CrowdStrike's guidance suggests that it is in for a difficult year
CrowdStrike ended fiscal 2025 with a 29% increase in revenue to $3.95 billion, while earnings increased by 27% to $3.93 per share. The company's fiscal 2026 guidance points toward a slower increase of 20% in its revenue. On the other hand, it is forecasting a 14% drop in its earnings per share.
CrowdStrike's outlook indicates that it is still feeling the aftereffects of a faulty software update in July 2024 that caused a major global IT outage. The company offered compensation packages to customers, including discounts and lengthening the term of some contracts, to mitigate the impact of the outage.
The company also points out that it had to contend with an extended sales cycle, a slowdown in upselling to existing customers, higher deal scrutiny, and a negative impact on its revenue pipeline. These factors seem to have negatively impacted CrowdStrike's revenue and earnings growth momentum, even though the company pointed out on the latest earnings conference call that it has completed its customer commitment program.
Another metric that points toward slower spending on CrowdStrike's offerings is its dollar-based net retention rate. This metric compares the company's annual recurring revenue (ARR) from its subscription customers at the end of a period to the ARR from the same set of customers in the year-ago period. So, the year-over-year decline of 7 percentage points in CrowdStrike's dollar-based net retention rate in the previous quarter to 112% indicates that it is witnessing slower growth in spending by existing customers.
However, there were also certain positives for CrowdStrike. For instance, the company ended fiscal 2025 with a record total contract value of $6 billion, an increase of 40% from the previous year. Looking ahead, CrowdStrike is anticipating an improvement in its growth profile in the second half of the current fiscal year as the aftereffects of its customer commitment packages fade. CEO George Kurtz is anticipating "net new ARR reacceleration as products are deployed, one-time discounts drop off, and contracts are upsized and renewed."
So, the possibility of an improvement in CrowdStrike's growth rate in the second half of the fiscal year cannot be ruled out. But then, buying the stock right now seems like a risky thing to do thanks to one reason.
The valuation is still expensive
CrowdStrike stock's healthy rally in the past few months has made it extremely expensive. It is trading at 20 times sales as compared to the S&P 500 index's sales multiple of 3. Meanwhile, CrowdStrike's forward earnings multiple of 97 is also quite rich for a company whose bottom line is expected to shrink this year.
So, the decline in CrowdStrike stock following its latest earnings report doesn't look like a buying opportunity. Of course, the company's huge contract book and the fact that it expects its total addressable market to jump to a massive $250 billion in 2029 are a couple of factors why it could eventually regain its mojo.
However, until the time CrowdStrike ceases to be expensively valued or there are signs of an acceleration in its growth that could help justify its rich valuation, it would be wise for investors to stay away from this cybersecurity stock.
