Earlier this week, the email systems at the U.S. Treasury and Commerce Departments were infiltrated by hackers. According to The New York Times, this was one of the largest and most sophisticated attacks in recent years. CrowdStrike's (NASDAQ: CRWD) cybersecurity platform was built to stop attacks like these, focusing specifically on protecting individual devices from laptops and smartphones to servers and data centers. Unlike many legacy vendors, CrowdStrike's platform integrates machine learning and cloud computing, creating a product that effectively stops even the most sophisticated attacks. When it comes to protecting endpoint devices, CrowdStrike is the best in the business. Here's why this company's future looks so bright.

A significant return on investment

The number of connected devices is growing rapidly, and more people are working remotely. This means that hackers have more potential targets, many of which are unprotected , increasing the likelihood of a costly attack.

Just how costly? According to IBM, the average breach does $3.86 million in damage, and takes 280 days to identify and contain. This is simply an unacceptable risk for the vast majority of enterprises, which is why effective cybersecurity is so crucial. Of course, any company can claim its products are effective, or that they create value for customers, but CrowdStrike can actually support those claims with hard data.


Image source: Getty Images

Forrester, a market research and advisory firm, recently conducted a study on the total economic impact of CrowdStrike's Falcon platform. The study, commissioned and funded by CrowdStrike, concluded that Falcon pays for itself within the first three months of deployment, and that over the course of three years, it saves customers an estimated $6.7 million. This represents a 316% return on investment. Forrester specifically cited Falcon's ability to reduce the risk of a data breach, improve investigation speed, and minimize reliance on support personnel as significant contributors to the overall benefit. 

Strong competitive advantages

In recent reports, both Gartner and Forrester have recognized CrowdStrike and Microsoft (NASDAQ:MSFT) as leaders in the endpoint protection market. While Microsoft is much larger and more profitable, CrowdStrike offers the benefit of being platform-agnostic. This means its software is not biased toward any particular operating system -- it works equally well in Linux, macOS, and Windows environments.

CrowdStrike further protects its competitive edge with its network effect. The company's cloud-based Threat Graph collects data from all protected customer devices, then uses AI algorithms to continuously analyze that data, looking for new or unusual threats. When a threat is identified on one customer's device, CrowdStrike uses that information to stop similar threats on all customers' devices. In other words, as more customers join CrowdStrike, the Threat Graph collects more data, which improves the AI algorithms and provides better protection for all customers.

Finally, CrowdStrike benefits from high switching costs. The process of changing cybersecurity providers can be costly and inconvenient, and often takes weeks or even months to complete. Those hurdles help CrowdStrike keep a high percentage of its customers  -- and those customers tend to spend more each year. In fact, CrowdStrike's dollar-based net retention rate has exceeded 100% since 2016. And in the last three years, the number of customers using four or more software modules has increased from 27% to 61%. That means CrowdStrike is generating more revenue per customer, but it also means those customers are becoming more reliant on CrowdStrike, which further increases their switching costs.

Additionally, CrowdStrike's strong competitive position has created pricing power, which has driven its gross margin upward over the last several years. This, combined with strong revenue growth, could make CrowdStrike immensely profitable in the future.

Metric 2018 2019 2020 Q3 2021
Revenue Growth 125.1% 110.4% 92.7% 85.8%
Gross Margin 54.1% 65.1% 70.6% 73.5%

Source: CrowdStrike SEC filings. Note: CrowdStrike is currently in fiscal year 2021.

A final word

Going forward, investors should pay attention to CrowdStrike's customer and revenue growth. Both metrics jumped over 80% in the most recent quarter, but any significant deceleration could be a sign that its business is buckling under competitive pressure. Additionally, any publicized news of a data breach involving CrowdStrike customers would be very bad for business. 

However, CrowdStrike is a founder-led company that offers effective, cost-efficient solutions that help enterprises protect their data. With cyberattacks unlikely to get less frequent or less dangerous, CrowdStrike's management sees a $38 billion market opportunity by 2023 In that light, the company looks like a rewarding long-term investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.