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CrowdStrike Shares Lag Behind Positive Cybersecurity Sector

James L. Flint

• August 28, 2023

CrowdStrike Holdings Inc. witnessed a decline in its shares on Monday compared to the overall positive trend in the cybersecurity sector. An analyst, who expressed concerns about potential risks to estimates, downgraded CrowdStrike's stock just two days before the company's earnings report.

CrowdStrike shares (ticker: CRWD) dropped by as much as 3.6% on Monday, reaching an intraday low of $144.17. These figures made them the worst-performing stock within the ETFMG Prime Cyber Security exchange-traded fund (ticker: HACK), which experienced a 0.4% increase due to slight gains across the sector. Only a few other companies, such as Zscaler Inc. (ticker: ZS) and Check Point Software Technologies Ltd. (ticker: CHKP), had negative numbers, with decreases of less than 1%. Meanwhile, the S&P 500 (ticker: SPX) showed growth of 0.6%.

Morgan Stanley analyst Hamza Fodderwala downgraded CrowdStrike's stock to "equal weight" from "overweight" in a note published on Monday. Additionally, he adjusted his price target to $167 from $178 prior to the company's fiscal second-quarter earnings report, set to be released on Wednesday after the market closes.

When asked about the timing of the downgrade, Fodderwala explained that he foresees potential downsides to consensus estimates for 2023 and 2024. These estimates assume a reacceleration of net new annual recurring revenue (ARR), a software-as-a-service metric that reflects the anticipated revenue based on subscriptions.

It will be interesting to see how CrowdStrike performs in its upcoming earnings report and if the concerns presented by the analyst prove to be valid.

CrowdStrike's Analyst Estimates

Analysts surveyed by FactSet have estimated an average Annual Recurring Revenue (ARR) of $3.14 billion for the quarter ending in October and $3.38 billion for the quarter ending in January. Looking ahead to fiscal year 2024, analysts forecast an ARR of $4.29 billion.

However, instead of a reacceleration, there is a possibility of another cut to ARR estimates in the second half of 2023, according to Fodderwala.

In June, CrowdStrike shares faced pressure due to a less-than-perfect outlook.

Fodderwala's cautious view is based on recent checks and data points over the last month, which indicate a further slowdown in key industry verticals like technology, telecommunications, and retail. Notably, Target Corp. and Home Depot Inc. are among CrowdStrike’s largest customers.

Additionally, Fodderwala expects headwinds that could impact consumption.

"While enterprises may have made progress in their cloud optimization efforts, the pace of recovery remains uncertain," said the analyst. "Public cloud deployments have been a significant contributor to CrowdStrike’s revenue growth."

It is worth noting that a significant portion of CrowdStrike’s new ARR last year was likely due to its partnership with Amazon.com Inc.'s Amazon Web Services, which serves as their largest go-to-market partner and contributes over 10% to their ARR.