Shares of endpoint security firm CrowdStrike Holdings (CRWD +2.12%) have been a hot commodity this year. Even after a much-needed cool-off post-second-quarter earnings report, the stock is still up 150% in 2020. And CrowdStrike upped its forecast for the rest of the year once again, indicating its cloud-based security for laptops, phones, and other devices remains a high priority as the world copes with COVID-19.
Helping CrowdStrike's advance has been networking and communications semiconductor giant Broadcom (AVGO 1.60%), which has turned itself into a software company with a few acquisitions. Specific to this discussion, CrowdStrike was called out as a beneficiary of Broadcom's acquisition of the Symantec enterprise security division (with the remaining company surviving today as NortonLifeLock (NLOK +0.00%)) earlier this year. Broadcom's latest report signals that its entrance into the world of cybersecurity is still helping CrowdStrike, but Broadcom stock shouldn't be written off either.
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Hardware and software, together at last
Broadcom reported revenue of $5.82 billion for the three months ended Aug. 2, 2020. Within the total, the semiconductor segment bread-and-butter fell 4% from a year ago to $4.22 billion, although a 5% sequential increase over a quarter ago was reported. As has been the case elsewhere in the tech hardware industry, Broadcom said cloud and enterprise purchasing has been on the rise as organizations make much-needed updates, but consumer lines are off from last year -- most notably in the smartphone market.
Within the infrastructure software segment, Symantec accounted for "over $400 million" of the $1.60 billion total. Excluding the reported Symantec intake, software sales were up 5% from a year ago. Broadcom CEO Hock Tan said Symantec results were flat with a quarter ago as expected as bookings with its core customer base increased, offset by a transition away from smaller commercial accounts. This was always part of Broadcom's plan when it added security to its networking management software ecosystem, a move that has helped CrowdStrike pick up new customers (more on that in a second).
In spite of the sluggish-looking results, Broadcom is doing just fine. Free cash flow notched a huge 33% increase during the quarter to $3.07 billion as the company has been making itself more efficient. Another solid report card means this remains a must-look dividend payer, with Broadcom stock currently yielding 3.5%. However, it ended July with $8.86 billion in cash but $44.0 billion in debt -- a key metric for investors to watch here. Yet given its improving bottom line, Tan and company expect to pay down some $3 billion in liabilities during the next quarter. At 14.1 times trailing 12-month free cash flow, this is a compelling tech value stock even if it contends with scrappy and fast-growing CrowdStrike on the security front.
The future leader in security?
A few months ago, during its first-quarter report, CrowdStrike CEO George Kurtz said his firm was displacing Symantec customers -- a comment we can assume refers to those smaller businesses getting abandoned by the legacy outfit under Broadcom's purview. But Kurtz has also contended that many organizations are the ones severing ties with their old security vendors. As he put it on the Q2 call, many companies are "shedding outdated systems and accelerating their move to modern cloud-native technologies to meet the demands of today's threat landscape and future-proof their security architecture."
And as a result of the pandemic and the ensuing remote work movement, the new security perimeter in need of protection is no longer a company's office building housing its employees. Rather, it's the hundreds of millions of endpoints being used -- often from a personal internet connection at home -- to access critical data and business operations. That's where CrowdStrike comes in, and its impressive run so far this year continued. In the three months ended July 31, 2020, revenue increased 84% year over year to $199 million, clobbering its outlook for as much as $190 million a few months ago. Full-year guidance was also increased again to $809 million to $827 million (previously $761 million to $773 million). With the update, management's forecast implies a 70% increase over last year at the midpoint.
While CrowdStrike is most certainly a premium-priced growth stock (a whopping 33 times expected current year sales), this security firm is quickly turning into a highly profitable firm too. Free cash flow was $32.4 million in Q2 compared with negative $29.2 million a year ago, good for a free cash flow profit margin of 16%. Not bad for a high-flying growth stock. That doesn't change the fact that it trades for such a high price tag, but it does provide a glimpse into why it fetches such a premium.
With security needs undergoing a sea change this year, I wouldn't write off Broadcom even though some of its newly acquired software assets are under attack, nor would I dismiss the hefty sum CrowdStrike goes for. For investors looking for a way to invest in the future of work, both stocks can play an important role in your portfolio -- Broadcom for the income and its slow and steady operation, and CrowdStrike for all-out growth potential.
