CrowdStrike Is One of My Largest Holdings and Trading Near Its All-Time High. Here's Why I'm Not Buying More Shares Right Now.
Key Points
CrowdStrike set company cash flow and free cash flow records in its most recent quarter.
CrowdStrike customers are increasingly using more of its cybersecurity products.
Trading at 44 times sales, CrowdStrike is the most expensive cybersecurity stock among its peers.
It has been a great year for cybersecurity company CrowdStrike (NASDAQ: CRWD), with its stock up 85% year to date. It's now one of the most valuable public companies in the world, with a market cap of over $220 billion.
I began investing in CrowdStrike shortly after its June 2019 initial public offering, and it has been one of my best investments since. But despite its strong performance and its hovering near an all-time high, there's one key reason I'm avoiding the stock for now: its valuation.
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CrowdStrike's business keeps getting stronger
Before we dive into valuation, let's take a peek at how CrowdStrike's business has been performing lately. It's been on an impressive run -- in its recent quarter (ended April 30), it set company records for cash flow from operations ($591 million) and free cash flow ($468 million).
CrowdStrike has a subscription model, so its annual recurring revenue (ARR) is a key metric for measuring financial performance. In the recent quarter, it added $256 million in new net ARR, up 32% year over year, bringing its total ARR to $5.51 billion, up 24% year over year.
It's one thing to attract new customers. But CrowdStrike's adoption and growth show that its cybersecurity products are among the best in the industry. A quarter of its customers use at least eight modules (the name given to specific solutions, such as cloud security). 35% use at least seven, and 51% use at least six. It's attracting and retaining.
Image source: Getty Images.
You can't ignore how expensive the stock is right now
The one caution with CrowdStrike's stock right now is its valuation. At the time of writing, it's trading at 44 times its sales. That's pretty expensive. For perspective, check out where three of CrowdStrike's key competitors are currently trading.
CRWD PS Ratio data by YCharts. PS = price-to-sales.
Trading at a high valuation alone isn't an issue. Premium companies often command a premium valuation. However, it can limit the upside or increase the chances of a pullback. Like many high-growth tech stocks, CrowdStrike is no stranger to volatility, so a real possibility.
I'm a believer in CrowdStrike and plan to hold on to it for the long haul, but right now I think my money is better off in a more fairly valued stock. I will undoubtedly buy more shares later, but I'm waiting for a more attractive entry point. I think it's a great company, just not a great value right now.
Stefon Walters has positions in CrowdStrike. The Motley Fool has positions in and recommends CrowdStrike and Zscaler. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.