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The Ratings Game: CrowdStrike stock heads for worst day ever as slowing subscriptions prompt debate on business spending

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Shares of CrowdStrike Holdings Inc. were on track for their worst day ever as new subscriptions grew more slowly than expected, prompting a majority of analysts to cut price targets on the cybersecurity company and debate whether its broader enterprise spending outlook was a risk.

CrowdStrike
CRWD,
-16.05%

shares dropped as much as 21% Tuesday and were last down 18% in afternoon trading, topping their previous worst day — March 16, 2020, which saw a 16.5% drop — since the stock went public in June 2019.

Late Monday, CrowdStrike said it only took in $198.1 million in net new annual recurring revenue, or ARR, in the third quarter — about $10 million short of what it and Wall Street expected — because of the way deferred revenue is structured in many large contracts. 

ARR is a software-as-a-service metric that shows how much revenue a company can expect based on subscriptions. CrowdStrike reported a 54% ARR increase to $2.34 billion from the year-ago quarter, while Wall Street expected $2.35 billion.

Of the 38 analysts who cover CrowdStrike, 35 have buy ratings on the stock and three have hold ratings. Of those, 24 cut their target prices, resulting in an average target price of $183.03, compared with a previous $237.18, according to FactSet data.

Morgan Stanley analyst Hamza Fodderwala, who has an overweight rating on the stock, told investors to “buy the dip.”

Fodderwala said “estimates now appropriately derisk for macro [and] positioning as growing consolidator enables stronger share gain vs peers.” The Morgan Stanley analyst said that “for a scaled high-growth [software-as-a-service] company” like CrowdStrike, “a meaningful slowdown is already priced in.”

As for smaller customers, spending decisions are likely being delayed. That puts some heat on CrowdStrike, as it raises the risk of increased competition from Microsoft Corp.
MSFT,
+4.26%

and its Defender suite of endpoint protection tools, said Citi Research analyst Fatima Boolani, who has a buy rating on CrowdStrike.

An “underwhelming print” and a “lower quality” pro services-driven revenue beat puts CrowdStrike’s “investment case on the defensive,” because small- to medium-sized businesses are more sensitive to budgetary pressures, Boolani said, which turns up the “‘Microsoft-competition’ bear case intensity.” 

In a note titled “The Macro Reaper Finds Another Victim,” Jefferies analyst Joseph Gallo, who has a buy rating and a $220 price target on CrowdStrike, noted that late Monday marked the company’s first miss on ARR.

In questioning whether the ARR guidance was prudent or a “further warning sign,” Gallo said that despite CrowdStrike’s “adamant” assertion that cybersecurity budgets would still grow in 2023, “some investors will wonder if we’re entering a broader period of PC/cyber digestion (& increased [Microsoft] competition).”

CrowdStrike’s results, however, also signal another development, which is that tech earnings are not exactly created equal this season, according to Mizuho desk analyst Jordan Klein.

Klein said “one key takeaway” from late Monday, as CrowdStrike, Workday Inc.
WDAY,
+15.77%

and Hewlett-Packard Enterprise Co.
HPE,
+7.18%

reported earnings, was that “differentiation” is crucial in reading tech earnings this season.

“There is no single trend, theme or driver that is impacting sectors and groups of Tech the same,” Klein said. “Companies [are] all seeing variations of macro impact, making it impossible for investors to play a theme or key trend around earnings.”

Read: Cloud software is suffering a cold November rain. Can Snowflake and Salesforce turn things around?

November has not been kind to cloud-software stocks. CrowdStrike shares are down 30% for the month, while the S&P 500
SPX,
+2.14%

has gained 2.2% and the tech-heavy Nasdaq Composite
COMP,
+3.19%

is up 3.5%. Meanwhile, the iShares Expanded Tech-Software Sector ETF
IGV,
+3.23%

is flat, the Global X Cloud Computing ETF
CLOU,
+4.74%

is down 1.3%, the First Trust Cloud Computing ETF
SKYY,
+3.40%

has fallen 3.8% and the WisdomTree Cloud Computing Fund
WCLD,
+3.56%

has dropped 8.7%.

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