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The cybersecurity stock is expensive, yes -- but the latest earnings show it's for a really good reason.
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CrowdStrike Holdings (CRWD +0.05%) is one of the fastest-growing names in the cybersecurity industry, and its recently minted public stock reflects that. Since its public debut in June, shares have doubled along with the endpoint security upstart's sales.
CrowdStrike joins a number of other cybersecurity outfits that dwell solely in the cloud -- names like Zscaler, Okta, and privately held but equally fast-growing iboss, which I'm told by CEO and co-founder Paul Martini is planning to go public within the next year as well. In spite of how young the company is, though, CrowdStrike has quickly become one of the largest firms in the cybersecurity industry.
The massive growth numbers continued in the second quarter, but shares took a much-needed breather. With the outlook for the business overwhelmingly positive, this looks like a good time for growth investors to make a small initial purchase.
While not as glorious as Q1, the second quarter of CrowdStrike's 2020 fiscal year (the three months ended July 31, 2019) was nevertheless impressive, and it surpassed internal guidance provided a few months before. According to its earnings report out Thursday, revenue grew 94% to $108 million, and while the company is still operating in the red (partly by design to maximize growth), operating expenses grew by a far lower rate of 51% when excluding stock-based compensation. Free cash flow was negative $29.2 million during the quarter, versus negative $35.7 million a year ago.
|
Metric |
Six Months Ended July 31, 2019 |
Six Months Ended July 31, 2018 |
YOY Increase |
|---|---|---|---|
|
Revenue |
$204 million |
$103 million |
98% |
|
Gross profit margin |
70.2% |
63.1% |
10.5 pp |
|
Operating expenses |
$220 million |
$129 million |
52% |
|
Net income (loss) |
($77.9 million) |
($66.5 million) |
N/A |
|
Adjusted earnings (loss) per share |
($0.47) |
($0.73) |
N/A |
CrowdStrike added 730 net new customers in Q2 for a total of 3,789. A third of its customer base has been added in the last two quarters alone, but half of them already use at least four services on the company's platform.
CrowdStrike is already making deep inroads in the business world and forming strong relationships with its customers fast, but there's plenty of room to keep expanding. Speaking to the cloud- and edge computing-based security industry specifically, CEO George Kurtz said the company estimates the total global opportunity to be $24.6 billion right now and for the market to exceed $29 billion by 2021. The sizzling numbers being posted have room to keep running, and they're expected to do so. Management upgraded full-year guidance to $445 million to $451 million -- up from the $430 million to $436 million outlook provided before, and good for at least a 78% year-over-year gain.
Image source: Getty Images.
As the number of devices has proliferated around the globe and workspaces have become increasingly decentralized, endpoint security like what CrowdStrike provides is picking up momentum. Investors of all types have been noticing, and there has been significant consolidation within the industry this year. BlackBerry scooped up Cylance, and more recently VMware announced it was taking over Carbon Black.
Kurtz said CrowdStrike has a distinct advantage, though, despite its young age and some of its peers getting plugged into a larger ecosystem. Since endpoints (like laptops, tablets, and smartphones, as well as IoT devices) work in the cloud, competitors that aren't cloud-native -- like CrowdStrike is -- have a more difficult time deploying protection to these remote devices. Most are attempting to make the transition to cloud-based security, but haven't fared so well. Kurtz explained that, if a customer is going to evaluate its vendors' new cloud security offering, they might as well also look at one of the leaders already in the space.
And thus CrowdStrike has been winning new deals and displacing the competition. The key selling points? A free trial of the CrowdStrike platform, as well as a security deployment across an organization's devices that can take as little as minutes. A newly inked deal with a beverage company based in Europe was also cited on the earnings call. The company chose CrowdStrike and was able to deploy protection for its devices scattered across the globe on day one, providing instant insight on operations and potential threats.
That all sounds great, but what about the cash burn? The company is anticipating an adjusted loss of as much as $95 million this year. However, though it's deep in the red, CrowdStrike had $827 million in cash, cash equivalents, and marketable securities at the end of July. That's enough to self-fund its aggressive spend-and-grow plan for years at current rates.
I'm certainly not saying this stock will have a steady rise; on the contrary, it will be downright volatile. Even though it's doubled in the last few months, shares are off their high-water mark by over 20% as of this writing. If you buy, keep that initial position small, and be ready to add more on the dips as you build out a position over time.