Is CrowdStrike Stock a Buy?

CrowdStrike Holdings' (CRWD -0.68%) mission is simple: to stop digital security breaches. The company's cloud-native Falcon platform protects clients from cyberattacks, securing devices and workloads in any environment (on-premise, virtualized, and cloud-based) against hackers.

Since its initial public offering (IPO) in June 2019, CrowdStrike share prices have soared over 300%, but investors haven't missed their chance. This cybersecurity company still looks like a good buy, even at today's prices. Here are four reasons why.

1. CrowdStrike works with mission-critical software

Cybersecurity is more critical today than ever before. More devices are connecting to the internet, more people are working from home, more enterprises are moving resources to the cloud, and attackers are getting more sophisticated. As a result, management estimates CrowdStrike's addressable market will reach $38.7 billion by 2023.

Image source: Getty Images.

To tackle this opportunity, CrowdStrike currently offers 16 different software modules, with solutions that range from endpoint and identity protection to cloud security and threat intelligence. But one of CrowdStrike's key innovations is that all of those modules are deployed through a single piece of software. This means customers can purchase the specific functionality they need without the complexity of adding multiple different agents, which is typically required by legacy vendors.

What's more, CrowdStrike's use of sophisticated detection techniques, like behavioral analysis and artificial intelligence, allows the company to provide industry-leading protection. In other words, CrowdStrike's clients get the best of both worlds: a less complex security solution that is also more effective. That's an incredibly strong value proposition.

2. CrowdStrike is still seeing strong customer growth

Not surprisingly, CrowdStrike's best-in-class solution has created high demand, which has powered incredible customer growth.

Data source: CrowdStrike SEC Filings. CAGR: compound annual growth rate.

A larger customer base means more revenue, and that's always good. But it also reinforces one of CrowdStrike's key advantages: its network effect.

CrowdStrike's AI-powered database collects and analyzes information from every protected device, and all that data is used to train AI algorithms to predict and prevent threats. Put simply, more customers means more data, and more data means better AI, which translates into better security. Over time, this should make CrowdStrike's platform increasingly valuable. 

3. CrowdStrike has a high customer retention

It's not enough to add new clients. To sustain growth, enterprises also need to keep existing clients. And CrowdStrike has done an excellent job.

In a recently published Gartner Peer Insights report, CrowdStrike received the highest customer satisfaction rating among all included vendors. That overwhelming approval has translated into high customer retention. In fact, CrowdStrike's gross retention rate has trended upward over time, jumping from 94% in the first quarter of fiscal 2018 to 98% in the second quarter of fiscal 2020.

What's more, CrowdStrike's dollar-based net retention rate has been equally impressive. Unlike gross retention, which only identifies the portion of revenue not lost to churn (customer cancellations), net retention accounts for cases where customer spending increases. And since the first quarter of fiscal 2019, CrowdStrike's net retention rate has exceeded 120%, meaning the average customer spends 20% more each year. That's very encouraging, as it signifies the company's land-and-expand growth strategy is working.

4. CrowdStrike is generating stellar revenue growth

CrowdStrike's ability to add and retain customers has translated into strong revenue growth. Moreover, the company is "rapidly taking market share in 176 countries," according to research firm Gartner. That's very encouraging.

Data sources: CrowdStrike SEC Filings, McAfee SEC Filings. TTM: trailing 12 months.

Investors should also note that CrowdStrike's revenue growth has easily outpaced that of its rivals. For instance, over the same time period, McAfee's (MCFE) revenue increased from $1.6 billion to $2.8 billion, or 38% per year. Likewise, Microsoft (MSFT 0.37%) just reported 40% revenue growth in its cybersecurity business over the last year. That's impressive for such a large enterprise, but it's nowhere close to CrowdStrike's top-line growth.

Investors should look for CrowdStrike to continue scaling quickly and, more importantly, to continue gaining market share.

A final word

Investors should take note that CrowdStrike stock currently trades at 67 times sales. That's an incredible premium compared to rivals like McAfee and Microsoft, which sit at 1.6 and 12 times sales, respectively. And investors should be aware that rich valuations tend to go hand in hand with volatility.

Even so, CrowdStrike is expanding quickly, and traditional valuation metrics aren't always the best way to evaluate high-growth stocks. Instead, I focus on finding companies with a big market opportunity, solid revenue growth, and a sustainable competitive advantage. CrowdStrike checks all of those boxes. That's why this stock is a buy.