(Bloomberg) — CrowdStrike Holdings Inc. investors face a precarious setup ahead of the cybersecurity company’s next earnings report, as its sky-high valuation faces rapidly deteriorating sentiment toward software stocks.
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The company’s shares have nearly doubled over the past year, putting it among the best performers on the tech-heavy Nasdaq 100 index, even after a series of disappointing results from software peers sent CrowdStrike tumbling from a record high last week. . But the rise in its share price has come at a cost: a valuation that makes it more expensive than almost all of its rivals.
“If they have some kind of negative surprise, it will be expensive, so you could easily see a pullback,” said Ivana Delevska, founder and chief investment officer at Spear. It reduced its position in CrowdStrike ahead of the earnings release and snapped up beaten-down rivals including Zscaler Inc. and Palo Alto Networks Inc.
CrowdStrike’s earnings update after Tuesday’s close comes at a time when industry players are facing increasing scrutiny from investors over the ability of future demand to support rapid growth and their claims that A.I. will stimulate performance. Shares of companies that managed to demonstrate solid sales pipelines were rewarded and those that didn’t were punished.
Zscaler saw its biggest rise in a year last week after reporting earnings that beat estimates and raising its full-year forecast as demand for its platform grows. On the other hand, Cloudflare Inc. fell after it lowered its sales outlook in late May, while Palo Alto Networks also gave a downbeat forecast, fueling concerns about future spending on cybersecurity.
CrowdStrike shares were down 0.7% at 2:16 p.m. in New York after swinging between gains and losses earlier in the day.
Investors will be looking for details in Tuesday’s report on CrowdStrike’s partnership with Amazon.com Inc. The tech giant has bet big on the company and will replace other defensive tools in its Amazon Web Services cloud computing business with protection and response CrowdStrike offers cyber threats.
Morgan Stanley analyst Hamza Fodderwala projects the company’s Charlotte AI chatbot assistant will add about $500 million in annual recurring revenue by 2028. The San Francisco-based company is “entering rarefied air” and is on its way of reaching $100 billion in market capitalization in the next 12 months, he wrote in a note.
Most analysts tracked by Bloomberg are similarly bullish on the stock, with their average price target sitting about 30% above the current share price. Bulls see shifts in security spending benefiting the company, with customers turning to end-to-end cybersecurity platforms, modern protection tools and artificial intelligence offerings.
“Spending on cybercrime prevention is going to grow very quickly,” said Irene Tunkel, chief U.S. equity strategist at BCA Research, adding that CrowdStrike’s position in this spending spree makes it “unsinkable,” similar to giants like Nvidia Corp. Alphabet Inc.
Those on the sidelines question the strength of future sales. Wolfe Research analyst Joshua Tilton, who rates stock holding, sees CrowdStrike’s core endpoint business struggling going forward. Many customers using older software have already switched to new offerings like CrowdStrike, he said.
“I think we just ran out of clue,” Tilton said.
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Shares of Apple Inc. closed at a high for the year on Monday, pushing its market value closer to the $3 trillion level. This is the latest sign of improving investor sentiment towards the iPhone maker.
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–With assistance from Carmen Reinicke and Subrat Patnaik.
(Updates to add Tuesday stock movements.)
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