Authored By Louis Stevens
For today's brief, I'd like to share with you an excerpt from Ben Graham's acclaimed book, "Security Analysis," in which he shared an ideology that arose during the concluding years of the Roaring Twenties, which preceded the Great Depression. This ideology was also prevalent during 2020 and 2021, and, in fact, you may read precise phrases that were used in both the 2020-2021 period and the period which Mr. Graham references in the excerpt below.
I view Mr. Graham's thinking as indispensable, timeless wisdom that is as relevant and necessary to internalize today as it was nearly 100 years ago. In this respect, it's a fairly incredible artifact of history, and, as such, I feel it worthy of your time today to review this excerpt.
Before I share some brief interpretation of Mr. Graham's thoughts, I invite you to read the excerpt.
Today, I do think it's worth emphasizing that valuations are quite benign/attractive for most of LAS' coverage universe, excepting perhaps Crowdstrike at nearly $400/share today, or 30x+ sales, which is very much an example that would be reminiscent of the utilities example Mr. Graham cited.
By which I mean Crowdstrike is essentially a software utility used by enterprises to defend against cybersecurity threats. As I've noted, it's mostly a boring end point, SIEM, Identity, and cloud security platform. This is not Google in terms of its ability to capture 90% market share and expand margins at will.
Palo Alto Networks recently announced that it would begin giving away its end point product under certain contract bundles for free. Crowdstrike is far from the only end point vendor and certainly not the only vendor of its various products, which implies that its unit economics and market share potential do have material constraints.
To this end, it's mostly a boring utility company in a certain respect, sans the government mandated monopoly, with substantial competition in its market. Notwithstanding this reality, the market has latched onto the notion that there is essentially no price too expensive to pay for this company, with its valuation now 4-5 standard deviations above the average price to sales multiple in the software industry.
Is There A Price Too High For Quality?
While not as egregious as the price at which it traded in the aforementioned exuberant period of 2020-2021, during which time the new era thinking was pervasive, the reality is that Crowdstrike's long run sale multiple will revert to the mean, i.e., 6-10x sales.
It's inevitable.
And we witnessed this inevitably in late 2022 and early 2023 when the stock traded to 10x sales. That valuation will come again, whether at $10B in sales, $15B in sale, or $20B in sales.
In closing, I wanted to create this brief to highlight the new era thinking that invariably arises for the market every few decades and can arise for a given company in any given year.
It is a dangerous, fallacious way to see stocks, and attention to valuation should always be paid to some degree.
