CrowdStrike’s Steep Valuation Makes It Outlier in Software Space

(Bloomberg) -- CrowdStrike Holdings Inc. investors face a precarious setup heading into the cybersecurity company’s next earnings report as its sky-high valuation faces off with rapidly souring sentiment for software stocks.

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The firm’s shares have roughly doubled over the past year, making them among the best performers on the tech-heavy Nasdaq 100 Index, even after a spate of disappointing results from software peers sent CrowdStrike tumbling from a record high last week. But its soaring share price has come at a cost: a valuation that makes it more expensive than nearly all of its rivals.

“If they do have some sort of a negative surprise, it is expensive, so you could easily see a pullback,” said Ivana Delevska, founder and chief investment officer of Spear. She trimmed her position in CrowdStrike ahead of its earnings release and snapped up beaten-down rivals including Zscaler Inc. and Palo Alto Networks Inc.

CrowdStrike’s earnings update after Tuesday’s close comes at a time when industry players are confronting heightened investor scrutiny on the ability of future demand to support rapid growth, and their claims that AI will juice performance. Shares of companies that have been able to demonstrate solid sales pipelines have been rewarded, and those that haven’t have been punished.

Zscaler surged the most in a year last week after reporting earnings that beat estimates and boosting its full-year forecast as demand for its platform grows. On the flip side, Cloudflare Inc. slumped after it lowered its sales outlook in late May, while Palo Alto Networks also gave a downbeat forecast, stoking worries about future spending in cybersecurity.

CrowdStrike shares were down 0.7% at 2:16 p.m. in New York after fluctuating between gains and losses earlier in the day.

Investors will be looking for details in Tuesday’s report on CrowdStrike’s partnership with Amazon.com Inc. The tech giant has bet big on the company, and will replace other defensive tools in its Amazon Web Services cloud-computing business with CrowdStrike’s cyber threat protection and response offerings.

Morgan Stanley analyst Hamza Fodderwala projects the company’s Charlotte AI chatbot assistant will add about $500 million in annual recurring revenue by 2028. The San Francisco-based company is “entering rarified air” and is on track to hit $100 billion in market cap over the next 12 months, he wrote in a note.

Most analysts tracked by Bloomberg are similarly bullish on the stock with its average price target sitting about 30% above where shares now trade. Bulls see changes in security spending benefiting the company, with customers turning to all-in-one cybersecurity platforms, modern protection tools and artificial-intelligence offerings.

“Spending on preventing cybercrime is going to grow very fast,” said Irene Tunkel, chief US equity strategist at BCA Research, adding that CrowdStrike’s position in this wave of spending makes it “unsinkable,” akin to giants like Nvidia Corp. and Google parent Alphabet Inc.

Those on the sidelines question the strength of future sales. Wolfe Research analyst Joshua Tilton, who rates the stock hold, sees CrowdStrike’s core endpoint business struggling in the future. Many customers using older software have already switched to new offerings like CrowdStrike’s, he said.

“I think we’ve just run out of runway,” Tilton said.

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Apple Inc. shares closed higher for the year on Monday, pushing its market value closer to the $3 trillion level. This is the latest sign of improving investor sentiment toward the iPhone maker.

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• Nvidia Corp. and Advanced Micro Devices Inc.’s chiefs showcased new generations of the chips powering the global boom in AI development, deepening a rivalry that’s shaping the future of artificial intelligence design and adoption.

• Atos SE received revised bids from the two consortia vying to take over the heavily indebted French IT company, and will work with creditors this week to choose between them.

Earnings Due Tuesday

• Postmarket

  • CrowdStrike

  • HP Enterprise

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--With assistance from Carmen Reinicke and Subrat Patnaik.

(Updates to add Tuesday’s share moves.)

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