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CrowdStrike Reports Wednesday, and Here’s Why I’m Not Married to the Stock

If you read Market Recon, then you know that cybersecurity provider Zscaler (ZS) posted a nice quarter, and increased guidance. You probably know I am long that name. ZS has been a long-time Sarge fave. Readers might know that I nibbled on CrowdStrike (CRWD) overnight, largely because cybersecurity providers are expected to be among the strongest performers within the broader software/cloud services industry going forward. Oh, and also because CrowdStrike’s brand is well integrated with Zscaler, and CrowdStrike reports tonight. Let’s explore.

Tonight

CrowdStrike is set to report the firm’s third quarter financial results on Wednesday evening. A consensus of 23 sell-side analysts is for adjusted EPS of $0.10 on revenue of $364M. The range of those 23 opinions runs from EPS of $0.08 to $01.3 on revenue of $359M to $372M. Over the past three months, all 23 of these analysts have revised their revenue projections higher, while 15 also revised upward their projections for adjusted profitability. Should the results land precisely upon what Wall Street is looking for, that would be earnings growth of 25$ on revenue growth of 56%.

Is the business slowing a bit? Probably. Revenue generation growth has been measured in the 70%’s for most of 2021 after growth in the 80%’s during the rush to work from home back in 2020. That said, I think I’m happy if growth lands close to 56% after all that. We are talking about larger numbers at this point. For the second quarter, CrowdStrike added 1,660 net new customers, after adding 1,524 in the first quarter. Recurring revenue is reliant upon customer adoption of the firm’s modules. Three months ago, 66% of CrowdStrike’s customers subscribed to four or more modules with 29% subscribing to at least six.

Zscaler Connection

Back in September of 2019, Zscaler and CrowdStrike announced a partnership where CrowdStrike’s AI (artificial intelligence) powered Threat Graph would integrate with Zscalers’ cloud security platform to provide customers (of both services) with real-time threat detection and automated policy enforcement that improves security across their networks.

Joint clientele would benefit from the partnering, being able to leverage each company’s offering to secure their organizations through conditional access, which prevents infected or non-compliant devices from obtaining resources until appropriate remediation is reached.

The marketing agreement offers mutual clients SSL inspection, data processing, “always on” zero day and ransomware protection, seamless protection with automated usage of Crowdstrike’s endpoint telemetry, visibility into exposed files identified by Zscaler as being malicious, and posture checks between the two services.

Why am I telling you all this? Simple. Because last night, Zscaler told all of us that they are looking to expand on their relationship with CrowdStrike.

Fundamentally…

The stock still has not posted a profitable quarter using GAAP accounting standards, and might not be closing in on that goal all that quickly. Oh, the balance sheet is in pretty good shape. Current assets not only dwarf current liabilities, but cash alone does that trick. Total assets also easily outweigh total liabilities. As of the second quarter, there had been no recent increase in long-term debt, and the current ratio was strong.

While the firm is losing some dough, unadjusted, operating cash flow, leveraged cash flow, and free cash flow per share have all remained positive, though were down for Q2 across the board from Q1. I would like to see some reversal there. I do not see the fundamentals as a reason to avoid the name.

The Chart

Readers will see over this two year chart that the shares, through well off of their highs, remained in an upward sloping price channel (illustrated in purple), while approaching the support line. This occurred as Relative Strength, the daily MACD, and the Full Stochastics Oscillator all weakened severely.

Should this level fail, I see the next line of potential support as a 38.2% Fibonacci retracement of the entire March 2020 rally through this past November. Let me show you up close…

Now, I think you can see why I tip-toed in last night. Just for about 1/8 of a full position. This may still be a trade and not an investment. The stock goes nowhere? I wait for the call and listen in. The stock just opened up 2%. You pay me four or five percent? I may just ring the register ahead of the digits. I am not married here. Zscaler is definitely my favorite of the two.

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