The S&P 500‘s delivered a terrific total return of 12.7% so far this year. Yet that pales in comparison to the explosive gains from cybersecurity specialist CrowdStrike (NASDAQ:CRWD).
Fun fact: the tech stock’s already up 131% since January!
As a shareholder, it’s hard not to look at the share price chart and smile. But with its market-cap now approaching $270bn, the valuation’s looking a bit shaky.
Why? Because, on a price-to-earnings basis, CrowdStrike shares now trade for a whopping 4,613 times! Even on a forward basis, the stock’s still trading at an alarmingly high 208 times earnings. So have investors taken leave of their senses? Or is there something else going on here?
Why CrowdStrike shares have exploded
As a quick reminder, CrowdStrike’s Falcon platform helps businesses protect their devices, workloads, and sensitive data with extremely specialised AI-powered solutions. It’s an exceptionally expensive tool. But with cyberattacks becoming increasingly sophisticated, demand’s nonetheless surged, and with it so has the business.
During its second quarter, revenue jumped 26% to $1.47bn, while annual recurring revenue climbed 25% to $5.84bn. And digging deeper, a big driving force is CrowdStrike’s Falcon Flex subscription model.
Annual recurring revenue from customers using Flex doubled to $2.29bn. And in turn, management’s raised its full-year net-new recurring revenue growth forecast to 34%. With all that in mind, it’s no wonder that the share price has taken off.
Taking a step back
It isn’t hard to understand why investors are so excited by CrowdStrike’s financial performance. But even the best companies in the world can make terrible investments if the wrong price is paid. And right now, CrowdStrike’s valuation’s pricing in near-perfect execution for almost a decade to come.
Needless to say, expecting almost nothing to go wrong between now and 2036 seems a bit far-fetched. Even more so given the rising level of competition from companies like Microsoft and Palo Alto Networks. And let’s not forget that CrowdStrike isn’t a stranger to disruptive technical failures.
So what’s the smart move right now?
Time to take profits?
CrowdStrike remains a phenomenal business with accelerating recurring revenue, expanding margins and exposure to potentially explosive AI-security demand. That’s why I continue to be a bullish shareholder.
However, no company’s invincible. With the valuation demanding nothing but extraordinary success, even a small earnings miss could trigger violent volatility. And it’s why I’ve actually begun trimming my position and banking some profits.
That way, if the stock continues to flourish, I’ll still benefit. But if it takes a tumble, I’ll have ammunition to take advantage. But this isn’t the only growth stock that’s been dominating the market lately…
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Zaven Boyrazian owns shares in CrowdStrike Holdings.
