The high-growth cybersecurity specialist CrowdStrike Holdings (CRWD -0.68%) announced this week that it agreed to acquire Preempt Security for $96 million in (mostly) cash and stock, which will enhance its platform with identity security capabilities. Here's why shareholders should welcome that move.
A growing cybersecurity platform
CrowdStrike has made some significant strides in the cybersecurity environment over the last few years with revenue growing from $52.7 million in fiscal 2017 (ending on Jan. 31) to $654.3 million over the last 12 months.
The company's innovative cloud-native and easy-to-use endpoint protection solution explains a part of that impressive performance. Users just need to have a light piece of software installed on their devices to leverage CrowdStrike's cloud-based threat intelligence and remain protected.
Image source: Getty Images.
The company has been growing its offering with extra modules that leverage its lightweight client software and cloud infrastructure. For instance, it developed a vulnerability assessment tool that detects flawed software on endpoints. And recently, the company expanded its footprint to the cloud with solutions that secure cloud-based software and applications (workloads).
That strategy has been producing outstanding results. During the last quarter, the percentage of subscription customers who used four more modules increased to 57%, up from 17% three years ago. And as upselling existing customers requires lower sales and marketing expenses than acquiring new ones, the company has been improving its margins. During the last quarter, operating margin was negative 15% compared to negative 47% in the prior-year period.
CRWD Operating Margin (Quarterly) data by YCharts
Zero Trust protection
By acquiring Preempt Security, CrowdStrike will further strengthen and expand its platform by enriching its threat intelligence with extra information Preempt Security's solutions will provide.
The buzzword associated with Preempt Security's business is "Zero Trust," which means the company provides security features in any trusted or untrusted computing environment. Leaving aside these marketing considerations, Preempt Security's solution actually detects and protects against suspicious activities related to user and device accounts (identities) based on location, resources being used, and more.
Thus, in contrast with identity platforms such as Okta and Ping Identity, Preempt Security doesn't manage identities. Instead, it provides real-time detection and prevention capabilities. But Preempt Security still competes with identity platforms as they have been developing similar security mechanisms.
CrowdStrike will propose Preempt Security's features as an extra module, which will create cross-selling opportunities.
A pricey stock
The acquisition remains modest relative to CrowdStrike's scale. The company agreed to pay $96 million, mostly in cash ($86 million) and the rest in stock ($10 million). That cash outflow will barely make a dent in CrowdStrike's $1.1 billion in cash and cash equivalents as of July 31, with no debt.
Management didn't communicate Preempt Security's financial performance, but it highlighted the acquisition will increase the company's $26.9 billion total addressable market by $2 billion. And Preempt Security should better capture that opportunity under CrowdStrike's umbrella. CrowdStrike can leverage its large and growing base of 7,230 subscription customers as of the end of July, up 91% year over year, to upsell Preempt Security's solutions.
Besides, research outfit IDC highlighted CrowdStrike was the fastest-growing endpoint security software vendor in 2019. With a more comprehensive platform that will combine identity protection capabilities with CrowdStrike's cloud and endpoint features, the company is poised to keep growing at a fast pace over the next several years.
However, despite the recent market correction, CrowdStrike stock remains richly valued at a market cap of 41 times its trailing-12-month revenue and close to its all-time highs, which means the market is already pricing in a lot of growth going forward. With its acquisition of Preempt Security, CrowdStrike is pulling the right levers, but the stock remains too pricey for me to get involved.
