Shares of cybersecurity specialist CrowdStrike(NASDAQ: CRWD) are down meaningfully early in 2026, despite the company announcing another quarter of strong growth and cash generation when it reported quarterly results last December.
Is the disconnect between the stock’s recent performance and the underlying business the basis for a buying opportunity?
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With the company scheduled to release its fiscal fourth-quarter and full-year results on March 3, this is a timely question. After all, better-than-expected results could cause shares to rebound when the company reports earnings. Of course, investors can’t rule out the possibility that the stock will fall when CrowdStrike reports earnings, either.
Unfortunately, there’s no way to know how the stock will move after the report, so investors may be better off focusing on the longer-term (and arguably more important) question: Does the stock look undervalued relative to its long-term potential?
Image source: Getty Images.
CrowdStrike’s third quarter of fiscal 2026 (ended Oct. 31, 2025) showed that its subscription revenue continued to drive robust results, with its security module adoption rates remaining strong.
The company’s revenue rose 22% year over year to $1.23 billion, while subscription revenue grew 21% to $1.17 billion. CrowdStrike said 49% of its customers were using six or more modules, up from 48% in fiscal Q2 and 47% in the year-ago period. Impressively, 34% and 24% of customers have adopted seven and eight modules, respectively.
CrowdStrike said annual recurring revenue (ARR) rose 23% year over year to $4.92 billion, and net new ARR was $265 million in the quarter. ARR is the annualized value of customer subscription contracts as of the measurement date, assuming contracts that expire in the next 12 months renew on existing terms.
The cybersecurity company‘s cash generation was a strength as well. Operating cash flow was $398 million and free cash flow was $296 million, translating to a free cash flow margin (free cash flow as a percent of revenue) of 24% in the quarter. This robust cash generation helped the company end the period with $4.8 billion in cash and cash equivalents.
“Q3 was one of our best quarters in company history,” said CEO George Kurtz in the company’s third-quarter earnings release. He pointed to its platform approach intended to help customers consolidate security tools.
But despite CrowdStrike’s strong cash generation and its impressive top-line momentum, there’s one glaring problem with the bull case for the stock at its current valuation: CrowdStrike remains unprofitable on a generally accepted accounting principles (GAAP) basis. CrowdStrike still reported a loss from operations of $69 million in fiscal Q3.
For a company with a market capitalization of about $98 billion, it’s concerning that it still isn’t reporting consistent, meaningful profits.
The valuation is asking for near-perfection from here. Even after the sell-off, CrowdStrike is still valued like a business that can profitably compound at a high rate for a long time with limited setbacks. Even its price-to-sales ratio of 21 is quite extreme for a software company. At a multiple like that, investors are not just paying for continued revenue growth. They are paying for sustained strength in net new ARR, a steady gross margin, and sufficient operating leverage to help CrowdStrike’s bottom line swing to substantial positive levels.
To the company’s credit, there are some huge positives to its economic model. CrowdStrike’s GAAP subscription gross margin was 78% in fiscal Q3, and free cash flow is robust. If the company can maintain these characteristics years after its bottom line turns positive, the security company’s valuation could work.
The risk is that cybersecurity is both crowded and increasingly sold in bundles. When a security tool becomes part of a broader platform deal, sold by deep-pocketed tech giants, pure-play cybersecurity companies may be pressured on price over time.
Then, of course, there’s execution risk, which CrowdStrike investors are already familiar with. The company has incurred significant incident-related costs associated with the July 19, 2024, Falcon sensor update. And those kinds of situations can create both direct costs and indirect friction in sales conversations.
So, is this a buying opportunity?
I would avoid buying shares here. The fundamentals are solid, but the valuation simply doesn’t leave enough room for any slip-ups or an environment that becomes more competitive over time.
If the stock keeps falling or if CrowdStrike can keep delivering elevated net-new ARR while swinging to substantial profitability, I would consider changing my mind.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.
