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CrowdStrike Holdings IPO: What Investors Need to Know

By Eric Volkman - Jun 10, 2019 at 8:58AM

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The world is full of cyberthreats. Can this newly public company make good money helping to stop them?

Is there room for yet another cybersecurity company on the public stock exchanges?

The market seems to think so. Exhibit A: CrowdStrike Holdings, a high-valuation tech "unicorn" that will launch its initial public offering (IPO) in the coming days. Let's take a look at this beast and see if it's worth the buzz it's attracted.

A hooded figure, seen from behind, sits at a computer station, suggesting a hacker at work

Image source: Getty Images.

Strike first

CrowdStrike is a cybersecurity company with a cloud-based solution, called Falcon, that defends networks against a wide range of cyberthreats. It uses artificial intelligence and crowdsourcing methods to identify threats and unveil them before they manifest. Nearly all of CrowdStrike's business derives from Falcon subscriptions. At the end of January, its subscriber list topped 2,500 names.

In the cybersecurity world, CrowdStrike biggest claim to fame is that it was the company that discovered the alleged hacking of Democratic National Committee servers before the 2016 presidential election.

That's a fine way to earn a lot of credibility and some free PR. Perhaps both have helped to attract clients; the business of CrowdStrike, founded in 2011, has really taken off lately -- revenue rose nearly fivefold, from the fiscal 2017 tally of $53 million to the almost $250 million of fiscal 2019, which ended Jan. 31.

But in no small part because of spiraling marketing and sales expenses -- free PR only goes so far -- the company booked a bottom-line loss in each of those three years. The scorecard reads $91 million in red ink for fiscal 2017, then $135 million and $140 million in the following two frames.

Distinct in the crowd

There's seems to be a lot of buzz around this IPO, to the point where CrowdStrike has significantly upped the anticipated price range for the IPO, to $28 to $30 per share, from the previous $19 to $23.

In spite of those still-deep net losses, CrowdStrike has a lot going for it. First, there's the excellent performance of the more popular cybersecurity stocks over the years. This stands to reason, as they are often high-growth businesses operating in a sector that has been, and should continue to be, very hot.

Palo Alto Networks (PANW -7.33%), to name a prominent one, is still up by 268% since its 2012 IPO. And that's despite a recent, somewhat mysterious pull-back. Another, Zscaler, has risen by 372%. Although certain peer cyber warriors haven't fared as well, those kinds of numbers are very impressive.

In fact, with the big boost to the expected IPO price, CrowdStrike has a good shot at breaking the IPO day record currently held by none other than Palo Alto Networks. Like CrowdStrike, Palo Alto Networks also added a few bucks to its IPO price. When the dust cleared, the company was standing atop a $2.5 billion market cap. CrowdStrike could hit almost $6 billion.

There's also the backing -- and tacit endorsement -- of tech giant Alphabet (GOOG -3.69%)(GOOGL -3.93%). That company's venture capital arm, CapitalG, has and will hold 11% of CrowdStrike's high-vote B shares -- more on them in a moment. Another early investor is veteran Silicon Valley venture capital company Accel, which has participated in many a successful and high-profile tech IPO over the years.

Although I'd be concerned with CrowdStrike's string of fairly deep net losses, that revenue improvement is something to behold. Plus, the company seems to enjoy a solid reputation, and the world is going to need reliable cybersecurity providers more and more. I also like that Alphabet's investment wing and a top VC are both along for the ride. This stock, then, might just be a winner in spite of the pre-IPO hype and hope.

The details

Like many tech companies that have come to market lately, CrowdStrike has a dual-stockholder structure, with A and B class shares. The latter confers 10 times the voting rights, and it's the class held by insiders, early backers like Alphabet's CapitalG, and management.

18 million A shares of CrowdStrike are being sold in the IPO, at a price of $28 to $30 apiece. The stock's first day of public trading is slated for Wednesday, June 12. It's to be listed on the Nasdaq under the ticker symbol CRWD.

The underwriting syndicate is large, and is being led by Goldman Sachs, JPMorgan Chase unit J.P. Morgan, Bank of America Merrill Lynch, and Barclays.

 

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