CrowdStrike reduces targeting due to disruption impact. Is the worst over for the stock?

Lots of eyes were on CrowdStrike (CRWD 2.06%) when the cybersecurity company reported its fiscal second-quarter results, as investors sought to get a better sense of the fallout from its well-covered outage this summer.

Despite losing more than a quarter of its value since early July, the stock has nearly doubled over the past year.

Let’s take a closer look at the company’s latest results and whether the worst appears to be behind the stock.

Lowered guidance

Because the outage occurred at the end of the quarter, the incident had little impact on CrowdStrike’s financial results. For the second quarter, the company grew its revenue by 32% to $963.9 million. That was ahead of the previous forecast for revenue of $958.3 million to $961.2 million. Subscription revenue rose 33% to $918.3 million.

Its annual recurring revenue (ARR), which is the annualized value of customer subscription contracts, rose 32% to $3.86 billion. Net new ARR in the quarter was $217.6 million.

The company’s adjusted earnings per share (EPS) rose from $0.74 a year ago to $1.04. Its previous guidance was for adjusted EPS of $0.98 to $0.99.

It generated operating cash flow of $326.6 million, while free cash flow was $272.2 million. The company ended the quarter with about $3 billion in net cash and short-term investments.

Among its modules that saw strong growth were cloud security, up more than 80% to an ARR of more than $515 million; Identity Security, up over 70% to over $350M ARR; and LogScale Next-Gen SIEM, which saw its ARR grow more than 140% to more than $220 million.

Over 65% of CrowdStrike customers have five or more modules, while 29% have seven or more. Meanwhile, the number of offers with eight or more modules increased by 48%.

Looking ahead, CrowdStrike estimates Q3 revenue between $979.2 million and $984.7 million, with adjusted EPS between $0.80 and $0.81.

The company’s management has reduced its guidance for the fiscal year, as shown in the table below.

Table by author. Data source: CrowdStrike files.

CrowdStrike said its quarter-end outage caused many deals to be delayed because it typically closes deals in the last two weeks of the quarter. However, he added that the “vast majority” was still under development. The company highlighted two big earnings after the outage, but said it has more than $60 million in deals it is considering in the quarter that remain open. These are expected to close in the coming quarters.

However, the company expects to see extended sales cycles and more transaction scrutiny. It’s also looking to get customers to commit to the Falcon platform for longer periods of time, which it believes will lead to fewer short-term sales and some higher levels of churn. She believes this will hit ARR and subscription revenue by about $60 million. It will also shift some planned sales and marketing spend to research and development, quality assurance and customer support.

Generally, look for these headwinds to last for about a year.

Image source: Getty Images

Time to buy dip?

Before the outage, CrowdStrike was widely considered to be the best of the breed in cybersecurity, but with the outage, its reputation took a hit. Not surprisingly, potential customers take longer to decide whether to adopt the company’s platform, while current customers think more about adding modules.

Overall, the consequences of the outage appear manageable, and the lasting impact should disappear if there are no more incidents. That said, the stock still trades at quite a premium to the cybersecurity group, with a forward price-to-sales (P/S) multiple of about 14 times analysts’ next-year estimates. These estimates may not have been fully adjusted below to account for the latest guidance.

CRWD PS report data (1 year ago) by YCharts

So while the stock and its valuation multiples are much lower than they were a few months ago, the stock is by no means cheap. In the long run, CrowdStrike’s story likely won’t change much because of this hiccup, and the worst may indeed be over for the stock. However, investors must weigh the stock’s valuation against its long-term prospects, and this appears to be in the balance right now.