Key Points
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CrowdStrike’s Falcon platform is one of the cybersecurity industry’s best all-in-one solutions for enterprises.
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The company recently executed a 4-for-1 stock split to make its shares more affordable for retail investors and its employees.
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The stock currently trades at a record-high valuation, which could limit its near-term upside.
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Some companies create so much value over the long term that their stock price rises into the hundreds or even thousands of dollars, making it hard for retail investors to purchase one full share. Companies can rectify this by executing a stock split, which increases the number of shares in circulation and reduces the price per share by a proportionate amount.
At the close of trading on Wednesday, July 1, cybersecurity giant CrowdStrike (NASDAQ: CRWD) executed a 4-for-1 stock split, which reduced its share price from $767 to $194. Splits don’t change the underlying value of the company, but it’s now much more affordable for investors with small portfolios to buy one full share in this cybersecurity leader.
That said, CrowdStrike stock has already soared over 65% this year, and I think its sky-high valuation could limit near-term upside. Here’s why investors might want to think twice before buying it.
CrowdStrike is a leader in the cybersecurity industry
The cybersecurity industry used to be highly fragmented, meaning enterprises had to buy products from multiple vendors to achieve an adequate level of protection. This left gaping holes in their defenses because these programs rarely interacted well with each other. CrowdStrike’s Falcon platform is one of the industry’s few all-in-one solutions, protecting cloud networks, employee identities, endpoints, and everything in between.
Falcon uses artificial intelligence (AI) to automate threat detection and incident response, giving enterprises more time to focus on their core operations. Customers can choose from 33 Falcon modules (products) to build an optimal cybersecurity solution, and with the Flex subscription option, they can use a fixed annual budget to switch among modules as their needs change.
CrowdStrike is working to protect customers adopting AI, as AI creates new attack surfaces for hackers to exploit. Falcon’s AI Detection and Response (AIDR) module, for instance, uncovers unauthorized AI agents or software apps running within an enterprise network. It also tracks all inputs and outputs across trusted AI apps, so it can detect anyone trying to orchestrate a breach by entering malicious prompts.
During CrowdStrike’s fiscal 2027 first quarter (ended April 30), AIDR experienced an eye-popping 250% increase in annual recurring revenue (ARR) from the prior quarter, indicating rapid adoption.
CrowdStrike is generating record amounts of revenue
CrowdStrike had $5.5 billion in total ARR at the end of the first quarter, which was up 24% year over year. Falcon Flex was the key growth driver, with its ARR doubling to $1.9 billion. Simply put, it appears the flexible subscription model is resonating with both new and existing customers.
CrowdStrike’s first-quarter results were so strong that management increased its full-year ARR guidance by $50 million to $6.54 billion (at the midpoint of the forecasted range). However, that doesn’t necessarily mean investors should rush out and buy its stock right now.
The stock split doesn’t make CrowdStrike a buy
While the recent stock split made a single share of CrowdStrike more affordable, its valuation is all that really matters. The stock is currently trading at a price-to-sales (P/S) ratio of 38.7, its highest level since going public in 2019. That makes CrowdStrike substantially more expensive than each of its main rivals in the cybersecurity space.
CRWD PS Ratio data by YCharts
Therefore, I think further upside in CrowdStrike stock will be limited in the near term, so investors looking for gains over the next few months might be left disappointed. However, there might be a case for positive returns in the longer run based on management’s 10-year forecast, which suggests the company’s ARR could grow to $20 billion by fiscal 2036. The stock is far more attractive on a forward basis if we assume that goal becomes reality.
There could be upside to that ARR figure, because CrowdStrike believes its addressable market in the cybersecurity industry will grow to $325 billion over the long term. Given how fast technologies like AI are moving, I won’t be surprised if that opportunity becomes even larger over time.
In summary, investors will have to adopt a very long-term outlook if they want to maximize their chances of earning a positive return on CrowdStrike stock, as its current valuation is almost certainly unsustainable.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Zscaler. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
