CrowdStrike (NASDAQ:CRWD), a cloud-based cybersecurity company that serves nearly half of the companies in the Fortune 100, went public at $34 per share last June. Its stock has since surged to more than $150 as of this writing. Let's see why investors fell in love with CrowdStrike, and whether or not it still has room to run.

What does CrowdStrike do?

CrowdStrike's main cloud-based platform, Falcon, bundles together various endpoint security, threat detection, and cyber-attack response services for large organizations. It serves many of the world's largest banks, healthcare providers, and energy companies.

A person access security services on a tablet.

Image source: Getty Images.

CrowdStrike differs from older cybersecurity companies, because it doesn't deploy on-site appliances. Instead, its tools are all cloud-based, which are easier to scale and update than on-premise solutions. Falcon also accumulates crowdsourced security data and analyzes it with AI tools.

The company offers its subscription-based services in ten cloud modules. It uses a "land and expand" strategy, in which a customer can subscribe to any number of cloud modules and tack on additional modules in the future as needs arise.

How fast is CrowdStrike growing?

CrowdStrike's overall growth is best measured by its total subscribers, ARR (annual recurring revenue), and dollar-based net retention (which indicates how much its existing customers are spending year-over-year).

Revenue surged 93% to $481 million in fiscal 2020, which ended on Jan. 31. Its ARR rose 92%, its number of subscribers soared 116%, and it ended the year with a net retention rate of 124% (compared to 147% a year earlier).

That net retention rate is impressive, since it means existing customers spent 24% more than a year ago, but it likely disappointed some investors -- its retention rate had previously tied nCino's as the highest ever for a cloud company at the time of its IPO. The two companies held that record until Snowflake arrived three months later with a retention rate of 158%.

Growth for subscribers, ARR, and revenue all decelerated in the first two quarters of fiscal 2021, but CrowdStrike is still growing at a much faster rate than many of its cybersecurity peers:

Growth (YOY)

Q1 2021

Q2 2021

Paid Subscribers

105%

91%

ARR

88%

87%

Revenue

85%

84%

YOY = year over year. Source: CrowdStrike.

CrowdStrike didn't disclose its exact retention rates in either quarter, but it claimed that percentage "exceeded" 120% during both periods.

The company also revealed that 57% of its subscribers had adopted four or more cloud modules in the second quarter, up from 55% in the first quarter and 50% a year earlier. That rising percentage indicates its "land and expand" strategy is working, and its retention rate could stabilize above 120%.

Management expects revenue to rise 68% to 72% for the full year, meaning its growth will continue to decelerate over the next two quarters. Analysts expect its revenue to rise 37% next year.

How profitable is CrowdStrike?

CrowdStrike's non-GAAP net loss narrowed from $119.0 million in fiscal 2019 to $62.6 million in 2020. That trend extended into the first half of the current year as it actually posted a non-GAAP profit of $12.5 million -- compared to a loss of $45.2 million a year earlier -- on revenue of $377.0 million.

On a GAAP basis, which includes stock-based compensation, the net loss also narrowed year-over-year from $77.9 million to $49.1 million in the first half of the year.

CrowdStrike's bottom line is improving, because its margins are expanding. It ended the fiscal second quarter with an adjusted subscription gross margin of 78%, up from 76% a year earlier. Its non-GAAP operating margin also reversed from a 19% loss to a 4% profit.

During the conference call, CEO George Kurtz attributed this margin expansion to the "business model advantage" of its cloud-native platform, which is easier to scale and deploy than older cybersecurity services. The shift toward remote work throughout the pandemic also buoyed demand for CrowdStrike's services as big stay-at-home companies like Zoom Video Communications deployed its security modules.

CrowdStrike expects to remain profitable for the full year with a non-GAAP net profit of $12 million at the midpoint, or $0.05 per share. Analysts expect that number to more than quadruple next year as margins further expand.

But is CrowdStrike stock too expensive?

Based on management's guidance, CrowdStrike trades at 40 times fiscal 2021 revenue with a quadruple-digit forward earnings multiple. Those frothy valuations could throttle CrowdStrike's near-term gains, and investors may still be wary of its decelerating sales growth and competition from companies like FireEye and Palo Alto Networks, which both offer similar cloud-based services.

Such a valuation might be easier to justify for a company with accelerating revenue growth, but in this case, I'd nibble on CrowdStrike at these levels, since I like its disruptive first-mover advantage, but I wouldn't build a bigger position until the stock cools off.