CrowdStrike Holdings Stock Surges on Work-From-Home and Shelter-in-Place Security Needs

CrowdStrike Holdings (CRWD -0.79%) had a great start to its 2021 fiscal year (the quarter that ended April 30, 2020). This wasn't just a case of a company doing well in spite of the coronavirus crisis. As a result of the worldwide disruption, CrowdStrike reported a surge in demand generated by work-from-home and shelter-in-place orders, blowing away its previous outlook for revenue growth of 73% in the first quarter.

As discussed a few months prior, it's looking like CrowdStrike has a black swan event on its hands -- a rare and hard-to-predict event that has big consequences -- but a black swan event that is propelling it into a leadership role in the cybersecurity industry.

A quick recap of the numbers

Headed into the new fiscal year, CrowdStrike was already getting a big boost from a world going mobile. Adoption of cloud computing, Internet of Things devices, and remote work have already turned the upstart endpoint security company into one of the largest cybersecurity pure-plays out there. 

Image source: Getty Images.

But COVID-19 has been a breeding ground for new cyber threats. The bad guys are trying to take advantage of organizations struggling to implement continuity plans and update their operations for the "new normal." It's become critical to protect data no matter where it's coming from, and as the world just got a sharp shove down the remote-work and shelter-in-place road, a lot more business data is emanating from a remote location outside of an office building. That plays right into CrowdStrike's specialty.

And after Symantec's enterprise division got taken over by Broadcom last year (with the remaining consumer-security outfit moving on as NortonLifeLock), large swaths of the enterprise security market have been vacated, leaving the door open for CrowdStrike to pick up new customers. The results in the midst of the current economic crisis are impressive, especially considering the company is coming off its first year as a public concern, one in which it notched full-year sales growth of 93%.  

PP = percentage point. Data source: CrowdStrike Holdings. Table by author.  

Not only is CrowdStrike picking up new customers (it still counts only 40 of the top global 100 companies as customers), but its dollar-based, net-revenue retention rate also came in at over 120% again during the quarter. That implies that existing customers spent an average of 20% more with CrowdStrike than they did a year ago.

And that's one of the strengths of this cloud security firm. Many enterprise security outfits see a fade in demand once the new normal has been adjusted to, but endpoint security like what CrowdStrike specializes in -- including more remote work made possible by the cloud -- is looking like more of an enduring growth story. And as companies continue to migrate more operations to the cloud, the need for more security increases. Thus, this company is growing on multiple fronts from both new organizations looking to make the most of the digital age as well as those that have already embarked on their digital transformation. Full-year guidance subsequently got another boost with revenue now expected to be up 59% at the midpoint (compared with a previously expected 51% increase).

Sure the revenue growth is great, but ...

One of the reasons I took a position in CrowdStrike (again) wasn't just for the revenue growth potential. Trading at 26 times expected current year sales, much of that growth is already baked in. Rather, I bought in because of how quickly the company is turning the corner on profitability. And in fiscal first quarter, CrowdStrike delivered in a big way.  

Adjusted net income (which backs out stock-based compensation and non-recurring items affecting comparability) turned positive for the first time, which is worth noting. But the real profitability metric -- free cash flow, measured as revenue less cash operating and capital expenses -- surged to positive $87.0 million during the quarter compared to negative $16.1 million a year ago. This can be a volatile metric, but it speaks to just how profitable the company can be as it adds more users to its platform. The quarter's free cash flow margin came in at 49%. Considering this is a high-growth technologist funneling ample cash back into itself to promote expansion, I'd say that's pretty good.  

I wouldn't expect that margin to hold all year, but after kicking off the new decade right, CrowdStrike is in superb financial shape. It has cash and equivalents of $1.0 billion on its balance sheet, zero debt, and surging demand for its security platform. Yes, shares trade for a hefty premium, but there's a lot to like about this next-gen cybersecurity industry leader.