If you're looking for companies that are at reduced risk from the coronavirus, CrowdStrike (CRWD +0.51%) is probably one of them. Granted, the effects of a potential recession remain uncertain, but the cloud-based cybersecurity company is poised to profit as companies and governments around the world require employees to work from home.
Yet despite strong fiscal fourth-quarter results, CrowdStrike is still an unprofitable operation sporting a sky-high valuation, which means investors must brace themselves as the stock will be volatile for the foreseeable future.
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A business that can thrive during the pandemic
The company has been posting strong revenue growth over the last several quarters thanks to its simple and efficient cloud-based cybersecurity solutions. Customers deploy CrowdStrike's small program on their endpoints (computers, servers, and other devices) to secure them. That program leverages CrowdStrike's cloud infrastructure (computing power and intelligence) to deal with threats.
The research company Gartner recognized the strength of CrowdStrike's solution. It positioned the company as a leader in its "Magic Quadrant" for endpoint protection platforms in terms of completeness of vision and ability to execute, which is remarkable in such a crowded and competitive market.
CrowdStrike also leverages its software and cloud infrastructure by selling additional modules. For instance, besides basic cybersecurity protection, the company offers a module that tracks unauthorized applications. Not only does this strategy contribute to growing revenue from existing customers, but it also increases the stickiness of the company's solutions. As a result, the net dollar-based retention rate came in at 124% during the last quarter, which shows existing customers increased their spending.
In addition, with 870 net new customers (up 116% year over year), the company posted better-than-expected results, including revenue growth of 89% year over year.
| Metrics | Fiscal 2020 Q4 Results | Original Guidance |
|---|---|---|
| Revenue | $152.1 million | $135.9 million to $138.6 million |
| Non-GAAP loss from operations | ($6.7 million) | ($21.6 million) to ($19.7 million) |
| Non-GAAP net loss per share | ($0.02) | ($0.09) to ($0.08) |
Data source: CrowdStrike. GAAP = generally accepted accounting principles.
With scale, management expects revenue growth to decelerate to 51% in fiscal 2021 based on the midpoint of guidance. But that growth rate remains impressive, and it takes into account the potential negative effects of the coronavirus.
In fact, CrowdStrike could benefit in the coming months. More and more people are working from home in an attempt to halt the spread of the outbreak. These employees need to work securely wherever they are, and many companies were unprepared for such urgent, widespread deployments. The simplicity of CrowdStrike's solutions may lead to its adoption with new customers.
Besides, with cash and equivalents of $912.1 million at the end of January and no debt, the company can weather a deteriorating business environment for some time.
Now, the volatility ...
Thanks to its revenue growth and operating leverage, CrowdStrike expanded its profitability during the last quarter as gross margin increased to 75%, up from 69% the prior year. The higher gross margin is due to the limited additional infrastructure required by the additional modules the company sells to existing customers and new ones.
Operating expenses also increased but at a slower pace than revenue. Sales and marketing costs represented just 55.4% of total revenue in fiscal 2020, down from 69.1% in 2019.
As a result, non-GAAP loss from operations narrowed to $6.7 million during the last quarter. And this trend should continue as management expects non-GAAP operating income to be breakeven during the last quarter of fiscal 2021.
Given these strong results, the market values the company at a forward enterprise value-to-sales ratio of 13. This demanding valuation means the market expects flawless execution and growth over the next several years. But the company will have to overcome unique challenges. For example, co-founder and CTO Dmitri Alperovitch left last month, which adds significant uncertainty as CrowdStrike relies on its innovative tech to remain competitive.
Over the last 12 months, shares of CrowdStrike have swung from over $100 per share to as low as $33 as the coronavirus-induced sell-off took hold. And since CrowdStrike is the classic high-growth tech company with no profits, the stock will continue on its volatile path.
This premium valuation offers no margin of safety, but lower prices may materialize over the next few quarters and present attractive buying opportunities for patient investors.
