THE FINANCE GHOST: It’s a long way to walk in shoes that are too big

If you feel like 10 years of progress in technology happened in the past 10 weeks, you aren’t imagining things. AI models had been bubbling under the surface and enjoying attention from early adopters for a couple of years, but Claude really set the world on fire in March this year when it achieved widespread use.

Then, in April, we saw the news break of Claude Mythos and its ability to find software vulnerabilities. CrowdStrike’s share price subsequently doubled before finally experiencing a minor correction in early June. The SaaSpocalypse might be hurting many of the biggest names in tech, but CrowdStrike and other cybersecurity firms have found themselves firmly on the right side of this trend.

The underlying bull case for this sector rests on one simple fact: almost nothing terrifies corporate executives like the prospect of a cyberattack. Far beyond the technical grasp of everyone but the chief technology officer in the boardroom, these attacks are seen as a potentially career-ending event that must be stopped at almost any cost.

By selling the combination of intense fear and a convenient solution, cybersecurity players such as CrowdStrike are benefiting from the old joke of “nobody gets fired for hiring IBM”. In fact, we saw the sheer level of market penetration when CrowdStrike suffered an outage in mid-2024 that practically broke the internet. It feels like the world depends on this company, which in itself creates a potential bear case around companies pulling back from concentration risk.

CrowdStrike’s market strength is no accident. The company has worked hard to differentiate itself, with Gartner naming it as a leader for the seventh consecutive year and the highest of all participants for the fourth year in endpoint detection and response (EDR).

EDR is where all the focus is right now, as the rapid adoption of AI has led to explosive growth in the number of endpoints. The more an organisation invests in AI, the more cybersecurity it requires.

CrowdStrike’s management can barely contain its excitement around an era where cybersecurity is seen as a strategic enabler of growth, not just a risk management tool. Without secure deployments, companies cannot embed AI in their businesses.

With agentic AI being all the rage, coupled with an ongoing boom across hardware, data centres, hyperscaler investment, neoclouds and more, there is a huge demand tailwind for CrowdStrike. And as the only cybersecurity company selected by both OpenAI and Anthropic to provide security for new model releases, it has a compelling story to tell investors around industry leadership.

CrowdStrike is wearing shoes for matric on the first day of grade 1. It’s going to take many years to grow into them

The market has taken gulps of this Kool-Aid, with CrowdStrike trading on a trailing price-sales multiple of 37. This is an eye-watering multiple by any standard, as most great tech companies trade at high single-digit price-sales multiples. CrowdStrike’s five-year average multiple is 26, so it has always been frighteningly expensive based on growth expectations.

The issue is that even with this excitement, net new annualised recurring revenue was up only 32% year on year. That’s a lovely growth rate, if the company was trading at a normal sales multiple. But at these levels, this doesn’t unwind the multiple quickly enough.

In simple terms, CrowdStrike is wearing shoes for matric on the first day of grade 1. It’s going to take many years to grow into them. With a free cash flow multiple of roughly 100, it could double its free cash flow and still be on a very high multiple of 50!

CrowdStrike is priced for perfection, despite bears pointing to myriad risks, including competition, being squeezed out by the likes of Microsoft (remember Zoom vs Teams?) and AI technology itself making CrowdStrike redundant.

There’s no doubt that CrowdStrike is a powerful company, as evidenced by record quarterly free cash flow of $468.5m at a 34% margin. It is attracting the best talent in the industry and has a seat at the table alongside the companies that are changing the world. It’s even a capital-light way to play AI, certainly compared to the hyperscalers.

But at this valuation, I can only watch from the sidelines. With a nervous market correction despite a wildly bullish earnings narrative and even stock splits to make the entry point more affordable for investors, the downside risk outweighs the upside potential. It also feels like we are a lot closer to the relative top of the cycle, with Alphabet executing a generation-defining capital raise. The SpaceX IPO is looming and Anthropic is also coming to market in the near future.

I’m bullish on AI. I can see why CrowdStrike is valuable. And if this parabolic share price comes down to earth, I’ll be waiting. But for now, I’m avoiding such wild valuations. I remember how long it took to get from grade 1 to matric.