CrowdStrike Earnings: Solid Q3 But Profit Margins Under Pressure

Key Morningstar Metrics for CrowdStrike

• Fair Value Estimate: $300
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of CrowdStrike’s Earnings

Why it matters: Despite the near-term headwinds caused by the July 19 IT outage, CrowdStrike’s CRWD growth engine continues to hum along. While we model some incident-inspired weakness in the firm’s upselling motion in the near term, we remain optimistic about the firm’s long-term growth opportunity.

• CrowdStrike’s annual recurring revenue was $4.018 billion, up 27% year over year. While management called out some weakness due to the July 19 incident, the robust ARR growth adds credence to our view that the outage’s impact would be incremental, not transformational.
• To retain customers after July 19, CrowdStrike has leveraged its Flex program, which offers customers better pricing if they purchase multiple modules. We like this strategy because it allows the firm to entrench itself into its customers' infrastructure, increasing its switching costs.

The bottom line: After we model in CrowdStrike’s strong quarter and updated guidance, which were in line with our expectations, we maintain our $300 fair value estimate for the narrow-moat firm and currently view shares as marginally overvalued.

• While the firm’s profitability was affected by increased costs stemming from the July 19 incident, we project margins to recover in the coming quarters. In the longer term, we believe the firm has room to expand, with substantial operating leverage built into its software business model.
• Following a strong third quarter, management raised its fiscal 2025 sales outlook to $3.927 billion, up from the $3.896 billion guided to last quarter, both at the midpoint of guidance. We expect the firm to beat this target, and are modeling fiscal 2025 sales at $3.939 billion.