Tech growth needs a timeout.
The recent earnings report from cyber security software firm CrowdStrike (CRWD) illustrates the difficulty for firms to project strength in forward guidance.
2023 isn’t looking so rosy for selling security software.
CRWD management offered us weak guidance citing a weakening macroeconomic picture and specifically telling us that small businesses are reluctant to sign new contracts for 2023.
The macroeconomic picture at best isn’t getting better, therefore, some of the forward guidance is coming in tepid.
The natural reaction is for tech stocks to sell off.
In 2022, it’s never been more difficult being a tech CEO and some of the best tech growth companies are getting haircuts that we used to never see before.
Even more worrisome is that tech companies like Apple and Twitter are starting to cannibalize each other because tech is now perceived as a zero sum game more than at any other time I can remember it.
Firms simply don’t think the pie is big enough to share.
This is why ecosystems like Apple and others are executing policies that directly hinder competition.
Unfortunately, cyber security is another add-on that is being sacrificed as tech companies become leaner and meaner.
Many tech companies can still function by skimping on the security defenses.
Shaving the fat to the bone is what we are currently seeing and that doesn’t bode well in the short term for tech stocks that are used to thriving in the excesses.
Another example is Snapchat (SNAP), which ordered back staff to a 4-day in-office work week starting February.
And it’s not just Snapchat or CrowdStrike.
The belt tightening has been broad-based in technology with DoorDash cutting another 1,250 jobs today.
Many of these growth companies over-hired during the government-mandated lockdowns and now are regressing back to the mean.
Since there are no more lockdowns in non-Chinese countries, there is no need for the giant number of DoorDash food deliverers.
Yet the US consumer is still spending even if they get less for each incremental $1 spent.
CrowdStrike reported annual recurring revenue (ARR) of $2.34 billion, up 54% year over year. The company also added 1,460 net new subscription customers for the quarter.
In high times, CrowdStrike and the tech growth with superior business models are unique and stand out.
However, in overwhelming macroeconomic weakness, CRWD gets lumped in with the rest.
I don’t recommend buying CRWD on the dip even if it feels cheap.
The peak CRWD share price almost reached $300 meaning the current stock price is only around 35% of what it once was.
Tech growth will overshoot to the upside when it finds it mojo again, which won’t come back until sometime in 2023.
The lockdowns brought forward a tsunami of demand, revenue, and momentum.
Now we are experiencing the reversing of those tailwinds which is why the stock price has suffered.
Avoid tech growth for now, they will have their time in the sun once again once the headwinds have been digested and CRWD should be on your list for a tech growth stock to purchase on the way up.
