Stock Analysis

Getting In Cheap On CrowdStrike Holdings, Inc. (NASDAQ:CRWD) Might Be Difficult

NasdaqGS:CRWD
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CrowdStrike Holdings, Inc.'s (NASDAQ:CRWD) price-to-sales (or "P/S") ratio of 12.4x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.2x and even P/S below 1.8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for CrowdStrike Holdings

ps-multiple-vs-industry
NasdaqGS:CRWD Price to Sales Ratio vs Industry May 5th 2023

What Does CrowdStrike Holdings' Recent Performance Look Like?

CrowdStrike Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on CrowdStrike Holdings will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For CrowdStrike Holdings?

The only time you'd be truly comfortable seeing a P/S as steep as CrowdStrike Holdings' is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 54%. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 30% per year over the next three years. That's shaping up to be materially higher than the 13% each year growth forecast for the broader industry.

With this in mind, it's not hard to understand why CrowdStrike Holdings' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does CrowdStrike Holdings' P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of CrowdStrike Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with CrowdStrike Holdings, and understanding these should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.