baoona
what happened?
It’s not unheard of for companies to overshadow competitors on an earnings call, but it’s unusual. This is exactly what CrowdStrike’s (NASDAQ: CRWD) CEO George Kurtz on an earnings call Last week, it seemed to allude to SentinelOne’s (NYSE: S)Trouble.
First, a little background.
When SentinelOne hits the market in 2021, it will compete fiercely with CrowdStrike in the endpoint protection market. When I searched for “CrowdStrike” on Google, I kept seeing SentinelOne’s pay-per-click ads. Those ads are now gone.
A Reuters report two weeks ago said SentinelOne was exploring options for a sale, while other reports said it could be sold to a private equity firm. It’s mixed news for SentinelOne investors.
On the positive side, the share price has risen as the sale price will almost certainly be higher than where it traded before the deal rumor. The stock is still down more than 35% in the last year, so many investors are still out of pocket.
On the other hand, when companies are struggling or underperforming, they are sold to private equity firms. Private equity firms like to slash costs, simplify operations, and sell companies for a profit soon after. They don’t always succeed; in fact, The Atlantic notes that companies acquired by private equity are ten times more likely to go bankrupt.
SentinelOne has denied these rumors.
Still, there’s no question that SentinelOne is struggling. Yes, their annual recurring revenue (ARR) rose 47% last quarter to $612 million, but that’s not as impressive as it looks.
- Percentages can be misleading. SentinelOne’s ARR increased by just $49 million in the quarter, while CrowdStrike’s ARR increased by $196 million.
- Despite stock-based compensation (SBC) accounting for 38% of sales, SentinelOne still hasn’t generated positive cash from operations (CFO), and is negative $40 million year-to-date. (As of Q2, CrowdStrike’s CFO revenue was $546 million, with SBC accounting for 21% of sales).
- SentinelOne’s ARR per customer is $56,000. CrowdStrike sells for well over $100,000. SentinelOne had a net retention rate of 115% in dollar terms, and CrowdStrike was over 125% (going back to 2019, the figure was over 120%).
- continuously.
Why is there such a gap? CrowdStrike’s Falcon platform is comprehensive and seamless, attracting more lucrative customers (most of the Fortune 500 plus the other 23,000 customers) who want the best product, not the discounted product.
What did CrowdStrike CEO George Kurtz say?
Here are my bold quotes and italic comments:
We’ve also observed a major shift in the competitive landscape, which is unique to CrowdStrike…In working in cybersecurity for the past 30 years, I’ve recognized and created a tectonic shift in the industry that we’re in right now. Organizations need better, faster, and more cost-effective digital social protection. Organizations need seamless, not stitched together (stamp) Automation breaks down legacy data silos.
The competitive battlefield in cybersecurity today reflects these realities, separate the wheat from the chaff.Those who own the platform vs. those who own the platform Point products masquerading as platform stories. (right uppercut)
Markets that were once populated by dozens of companies are rapidly consolidating into multiple vendors. Smaller companies with narrower product ranges are being left behind. These companies are rapidly following the path of traditional AV, Already in the hands of a strategic or private equity buyer or looking for safety. (knocks down punch and obviously shoots SentinelOne directly).
Point product, single function cloud security company study hard (insulting hurt) Platforms built by design win at scale.
Of course, Kurtz didn’t mention SentinelOne by name, but the comments about the private equity buyer really struck me.
Is CrowdStrike stock a buy?
CrowdStrike has perfected the art of making spectacular results look mundane. I often write that the right cybersecurity company is a great investment in this environment. Cybersecurity is an absolute must, an ounce of prevention is worth a hundred pounds of cure, and companies cannot afford to cut budgets in this area.
do not trust me? Amazon’s (AMZN) AWS growth rate has slowed to 12% this year (it has been above 30% for years) as the company is reducing its data usage budget. But CrowdStrike’s ARR grew 37% last quarter, with net new ARR increasing from $174 million in Q1 to $196 million in Q2.
CrowdStrike isn’t lowering prices for that, with GAAP gross margins of 78% and non-GAAP gross margins of 80% in the second quarter.both are up compared to last year. The company also became profitable on a GAAP basis for the first time this year.
GAAP profit is a great achievement; however, GAAP performance is not how a company like CrowdStrike is measured these days. Should be measured against (1) long-term target operating model, (2) cash flow, and (3) growth.
Source: CrowdStrike
1. CrowdStrike has hit most of these goals, despite operating and free cash flow margins of just 19% and 29%, respectively.
2. As the company scales, free cash flow and cash from operations soar. The chart below shows the trend per share:
I use a “per share” basis because we’re all worried about dilution.
The company’s stock-based compensation (SBC) as a percentage of revenue continued to decline, from 23% in the same period in 2022 to 21% in the second quarter of this year.
3. We have already discussed growth. CrowdStrike keeps going. It raised its revenue guidance for the current fiscal year to more than $3 billion, up 34% from the previous fiscal year.
CrowdStrike isn’t cheap at 14.5 times sales, but it’s cheaper than some of the other high-growth favorite software-as-a-service ((SaaS)) companies like Palantir (PLTR) and Snowflake (SNOW), as shown shown below.
The company is also trading near its recent average price-to-sales (P/S) ratio, so if it continues to grow and maintain a similar valuation, it will easily outperform the market.
Still, it would be wise for interested investors or existing shareholders to take advantage of the pullback.
Of course, there is no stock in the discounted DVD case. But I’d rather pay a little premium for top quality. These companies have long outperformed the market.
