IPO darling CrowdStrike Holdings (CRWD 0.14%) has enjoyed a rising stock price, recently reaching an intraday high of $101.88, up 60% from its market debut at $63.50 in June. Investors have been attracted to CrowdStrike for its software-as-a-service (SaaS) cybersecurity capabilities, which were built from the ground up to support cloud computing environments.
The stock as of this writing trades around $83, having lost ground as competitors such as VMware make moves threatening the company's position. VMware recently acquired Carbon Black, which, like CrowdStrike, focuses specifically on endpoint security. (More on that in a moment.)
But at more than 30% above its opening price, does the stock have room to rise?
Image source: Getty Images.
Playing in a red-hot space
Cloud computing has been a hot industry, and it's no surprise why. The approach allows a company to expand and contract its need for computing power by accessing remote servers via the internet (i.e., the cloud). This allows a business to react to events in real time, like a surge of visitors to its website when running a sale, which would require increasing the number of available servers, then reducing costs by turning off these additional servers when the spike in site visits ends.
In this way, corporations can dramatically reduce IT expenditures. Instead of investing in hardware and software to support infrastructure, along with hiring staff to set up and maintain it, businesses can offload these costs to third parties with expertise in IT infrastructure, such as Alphabet, Microsoft, and Amazon.
The market is expected to continue growing as more companies migrate their technology to the cloud. Forecasts predict the cloud computing industry will reach $250 billion next year, an increase of 17% over this year. Research firm Gartner estimates cybersecurity's share of this cloud computing pie will total $14.1 billion.
This market opportunity has led to a deluge of competitors battling for cybersecurity supremacy. Despite the competition, CrowdStrike saw revenue grow 103% year-over-year to $96.1 million in its most recent quarter. Moreover, Gartner listed CrowdStrike as among the leaders in the space based on its "completeness of vision," its product offering, and the company's ability to execute on that vision.
Offering an attractive product
Another advantage is CrowdStrike's compelling product offering, with its combination of easy setup and artificial-intelligence-powered security. These two things are a crucial part of its Falcon platform, a SaaS solution that monitors all endpoints for its clients. An endpoint is any device used to connect online.
CrowdStrike's ability to monitor all endpoints is important because we've become a society of multiple devices. Gone are the days when an employee accessed company information only at work. Today, employees are likely to answer company emails on their own mobile phones or tablets as much as via their desktop computer in the office.
If companies are not monitoring every way an employee accesses work information, it opens up vulnerabilities that enable criminals to harm the company. Damages from cybercrime are estimated to reach $6 trillion by 2021.
CrowdStrike's use of AI, through a technique called machine learning, enables the company's software to identify threats dynamically. Its system collects data on the devices trying to access a client's network, and uses it to not only identify threats but to learn about new threats. This is a key feature since criminal hackers constantly evolve their attacks. Since CrowdStrike's AI-powered software can evolve along with the hackers, it makes CrowdStrike's product more reliable than traditional security measures offered by competitors like Symantec.
Another key advantage is the easy setup. While companies like VMware juggle a hodg-podge of products for clients to implement, CrowdStrike can get its solution installed and operational on an endpoint in less than 30 seconds, according to CEO George Kurtz. This capability helped CrowdStrike grow its customer base nearly 18% in the most recent quarter.
Delivering a proven revenue model
CrowdStike's ability to capture new customers is certainly important to growing its top line, but its true bread and butter is its ability to retain and upsell existing customers. Selling more to existing customers is a much cheaper means of growing revenue than acquiring new customers.
In this arena, CrowdStrike is delivering impressive results. When it comes to the company's dollar-based net retention rate -- which reveals the percentage of revenue from current customers a company retained from the prior year after accounting for upgrades, downgrades, and churn -- CrowdStrike reported a remarkable 147% through January 2019, easily exceeding its benchmark of 120%. This indicates CrowdStrike is not only maintaining its spend levels from existing customers, but that spend is growing.
Since CrowdStrike's products are primarily subscription-based, its annual recurring revenue (ARR), a key metric for subscription-based businesses that shows the revenue coming in each year from subscriptions and indicates what the company can expect to repeat, is an important indicator of its success. In Q1, CrowdStrike's ARR grew 114% year-over-year.
Consequently, non-GAAP subscription gross margin grew to 73% compared to 62% in the same quarter last year.
While Q1 results were stellar in many places, operating expenses need more improvement. The company's Q1 non-GAAP loss from operations was $22 million, which was an improvement over last year's Q1 loss of $31 million.
Although CrowdStrike's bottom line appears unhealthy, tech companies have a history of running at a loss for years before turning profitable. As CrowdStrike invests in technical advances such as being the first to deliver its cloud-based endpoint protection system to mobile devices, it will continue to operate in the red in favor of growing market share and its customer base.
These early investments enabled CrowdStrike to become a leader in the cybersecurity space. It's proven to be a smart strategy that has led to an average of 20% revenue growth over the last three quarters.
CrowdStrike's upcoming Q2 earnings report (scheduled for Thursday) will confirm if the company can continue to deliver consistent performance. Given its advantages and track record of success, CrowdStrike is well-positioned to continue its exciting growth.
