Crowdstrike Q2 2022 Earnings Preview for Growth Curve Investors

Crowdstrike reports Q2 2022 earnings today, 08/30/2022 after the market closes. It is the third largest position in The Growth Curve portfolio at a current value of $10,227.

This post will cover what I’m watching as a long-term investor in Crowdstrike’s report. Hopefully, for others, it will help you ignore all the noise that comes from the short-termness of 99% of other financial coverage.

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Analyst Earnings Expectations & Management Guidance

Growth Curve investors should be looking 3+ years out but let’s quickly cover what analysts are currently expecting for Q2 earnings and Q3/FY22 guidance. The immediate reaction will be based on whether or not beats or misses these expectations so it’s helpful to know why short-term traders are rushing to buy or panicking and selling even if we’re relaxing and doing nothing.

For Q2 analysts are expecting GAAP EPS of -$0.20, adjusted EPS of $0.27, and $516.44M in revenue.

For FY 2023, analysts are expecting Adjusted EPS of $1.21 and revenue of $2.20B

Management tends to guide conservatively, but what I care about more from a business perspective is whether or not management can be trusted. One way to gauge that is their consistency in hitting (or beating) their own guidance even during volatile times. If they’re able to it’s a great sign. It shows management is reliable but also that the business lends itself to some level of stability/predictability.

For Q2, management guided to $514.7M in revenue, and adjusted EPS of $0.28

For FY 2023, management guided to $2.198B in revenue and adjusted EPS of $1.20

Current Valuation/Multiples

A lot of people really hate using enterprise value to sales multiples, but I believe that’s a good metric for hypergrowth companies.

Crowdstrike’s trailing EV/S ratio is 26.4 which is definitely high. However, it’s important to factor revenue growth into the equation. A guest on the Invest Like the Best Podcast recently talked about looking at EV/S to sales growth rate. Here is the snippet.

So if we take EV/S and divide it by revenue growth, we want it to be around 0.43 based on what Robert says there.

If they hit $515M in revenue this quarter, thats 53% YoY growth. The EV/S of 26.4/53 = 0.49.

So the EV/RG (Enterprise value to Revenue Growth) ratio is 0.49. a roughly 15% premium to the historical average for enterprise software.

I feel that’s within range for CRWD. If it gets up to 0.8 or higher, I would likely trim my position.

For a quick visual comparison, I created this chart on Wiijii that shows a comparison of and The X-axis is revenue growth, the Y-axis is EV/S, and the bubble size represents total revenue.So CRWD trades at a higher multiple than the others but it’s growing revenue slower than ZS, OKTA, and S (as of last quarter) and it has more revenue than all of the others except for PANW.

Alright, last chart I promise. The previous chart shows a comparison on multiple and growth with respect to total revenue. But let’s take it a step further and look at profitability.

The X-axis below shows net income margin, Y-axis shows EV to revenue forward and the bubble size is annual revenue growth. In general, we can see CRWD is much closer to profitability than S, OKTA, ZS, and NET with roughly the same revenue growth rate of NET, ZS, and OKTA and a bit lower forward EV/R.

I own NET and CRWD. Basically, I think they deserve their multiples, have paths to profitability, and have long runways of 25%+ revenue growth ahead.

Long-term business indicators

Here are the business indicators that inform my view as a long-term investor in this company.

What I truly care about is how many customers the company added this quarter, how many modules on average customers use, and customer retention/expansion.

If the company can continue growing its customer base and get customers to use more modules (products/features), then they will be customers longer, and spend more money.

That mix of new customer growth, customer retention, and increased spending is how the best SaaS companies sustain revenue growth and eventually become profitable.

Customer Growth

The customer base grew 82% in FY 21, 65% in FY 22, and 57% in Q1 FY 23. I want to see customer growth somewhere above 45% for FY 23.

As of last quarter, 71% of customers used 4 or more modules, 59% used 5 or more, 35% used 6 or more, and 19% used 7 or more.

Ideally in the next two years, we see over 50% of customers using 6 or more modules and over 30% of customers using 7 or more.

Finally, we want to see gross customer retention (the bottom line below) stay above 97%, ideally above 98%, and Net revenue retention for subscription revenue stay above 120% but preferably increase to 125%.

During the conference call I’ll be listening to management’s commentary around the demand environment they are seeing. Whether or not they believe they are gaining or losing market share if they are sustaining or increasing their long-term growth and profitability targets, and whether or not they are maintaining or slowing their hiring plans.

I have no prediction as to what I think the shares will do after the company reports earnings. I’ll be looking at the health of the business.

I have no plans to make any changes to my position. I’ll send another email reviewing the earnings and let subscribers know before I make any changes!

Good luck out there.

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