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CrowdStrike: An IPO With Explosive Growth

By Luis Sanchez CFA - Jul 5, 2019 at 5:31PM

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CrowdStrike has excited investors with strong sales growth. Can it continue to deliver?

In less than eight years, CrowdStrike ( CRWD 4.94% ) went from little more than an idea to a $12 billion enterprise trading on the Nasdaq. The cybersecurity software company IPO'd in June 2019 to great fanfare and has nearly doubled from its $34 per share offering price.

What has investors so excited? In a word, growth.

Crowdsourcing cybersecurity

Cybersecurity is a cat-and-mouse game. Cyberattackers are constantly searching for new ways to infiltrate networks. To detect attacks, most legacy cybersecurity companies reference databases of known hacking methods and computer vulnerabilities. These databases are good at preventing known attack methods but slow or unable to detect and prevent emerging cyberthreats.

CrowdStrike has taken a new approach to cyber defense. The company is pioneering the use of artificial intelligence (AI) tools to discover new cyberthreats in real time. AI tools can uncover new forms of hacking through pattern matching against a broader set of data points that can identify threats more quickly and stay one step ahead of attackers.

Once threats are identified, CrowdStrike centrally stores the data it collects from all of its customers. This data is used to build its catalog of threats and immediately protect all customers from any threats uncovered.

In a sense, the company is using data collected from customers to crowdsource cybersecurity solutions -- hence the name CrowdStrike.

A mysterious hooded man whose face is in black using a computer.

Image Source: Getty Images.

End-to-end protection

Another key cybersecurity problem faced by organizations is that there's a patchwork of solutions. For example, a company might use one software vendor on individual employee computers but a different vendor for securing the network. As a result, security solutions are generally compartmentalized systems, which can create security gaps.

Again, CrowdStrike has an innovative solution. The company's security-software platform is cloud-based and easily deployable across all types of devices throughout an organization. Because of this, it eliminates potential security gaps that can be created between departments or functions. And since it's cloud-based and works across all devices, it eliminates potential security gaps between employee devices and works both on and off an organization's premises.

The combination of CrowdStrike's unique approach to detecting threats with its effective end-to-end protection has resulted in the development of a formidable security-software offering.

Explosive growth

CrowdStrike sells its software-as-a-subscription to organizations of all sizes and sells a different level of service depending on an organization's size and complexity. The company's growth strategy is to replace one aspect of an organization's cybersecurity software and then upsell the customer on using more CrowdStrike software.

This "land and expand" strategy has been working. Last year, pre-existing customers net grew their spending on average by 47%.

As evidenced by the table below, the company is rapidly growing its sales. CrowdStrike can't double its revenue every year, but for now, investors can probably expect the robust pace to continue as the company is now starting to execute its growth plan.

CrowdStrike Financials 2017 2018 2019
Total revenue $52.7 million $118.8 million $249.8 million
Revenue growth N/A 125.1% 110.4%
Gross profit $18.7 million $64.3 million $162.6 million
Gross profit margin 35.5% 54.1% 65.1%
Net profit (loss) ($91.3) million ($135.5) million ($140.1) million

Data Source: CrowdStrike financial reports.

However, CrowdStrike is still unprofitable and has seen its net losses expand over the past two years. While investors appear to be writing this worry off, at some point, the market will expect this metric to reverse.

The silver lining: Gross profit margins have been expanding and hit a healthy 65% level last year. It's quite possible that as the company continues to grow its revenue, it will achieve levels of scale that will enable it to become profitable -- but when that will happen is hard to determine right now.

Looking ahead

CrowdStrike dazzled investors with its strong public market debut, but the company will need to continue delivering strong revenue growth to keep investors happy. That's probably easier said than done.

Although CrowdStrike appears to have a highly innovative and effective cybersecurity solution, it has plenty of competition. At some point, the company will also be pressured to become profitable, although investors do not seem too concerned with profitability right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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