Many investors have started to wonder how well CrowdStrike Holdings (CRWD 2.03%) would fare when it laps its financial results from the start of the pandemic. That's when many people were forced to work from home and companies were. forced to make upgrades to their digital security capabilities.

The indications so far are that CrowdStrike is doing just fine. The endpoint security leader reported a great end to its latest fiscal year, and it expects revenue to grow at least another 50% over and above 2020 levels. 

Unfortunately, this anticipated growth is already priced into the stock: At over 35 times one-year forward expected revenue, this is an expensive stock. But there are good reasons why. 

Someone in a hooded sweatshirt on a laptop, illustrating cyber crime.

Image source: Getty Images.

A notoriously challenging cybersecurity industry

The cybersecurity industry is a notoriously difficult one for software companies to stay atop. Cybercriminals are intelligent, employ their own set of increasingly complex technology, and sometimes even get the backing of government entities. Security software vendors need to constantly innovate to stay ahead of the bad guys. 

CrowdStrike's AI-powered cloud software for endpoints (laptops, phones, really any devices connected remotely outside of an office) was already a great solution pre-pandemic, and it ended up being thrust into the spotlight when the world went on lockdown last year. Now that remote work is going mainstream, the growth story appears to have staying power. CrowdStrike's annual recurring revenue (ARR) increased 75% to $1.05 billion during the fourth quarter. CEO and co-founder George Kurtz stated on the earnings call that this makes CrowdStrike "the third-fastest cloud-native [software-as-a-service] SaaS company reported to reach $1 billion in ARR following fellow pioneers and Zoom Video Communications." Pretty good company to be in. 

And the guidance was solid too. The company thinks full-year revenue will be at least $1.31 billion. Clearly there is compounding interest in what Crowdstrike has to offer. After its 2019 IPO, CrowdStrike doubled up on its sales for a couple quarters, grew 82% last year, and now thinks it will expand another 50% in the next year. This explosive growth is doing wonders for the software firm, helping it quickly achieve profitability (free cash flow was $293 million in the last year, a 34% free-cash-flow profit margin) and add to its talented team of developers. This rapid top- and bottom-line growth explains why CrowdStrike stock trades for such a hefty premium. 

A potentially transformative acquisition

But there's an even more important factor to consider before purchasing this "expensive" stock. I've cautioned in the past that a critical problem for CrowdStrike to solve is expansion beyond its endpoint security core proficiency. The company is delivering on that front in spades. It's added multiple modules to its platform to help secure various parts of a cloud-based operation, manage user identity, and snuff out vulnerabilities within a system. But it's used its newfound profitability and strong balance sheet ($1.92 billion in cash and equivalents, offset by $738 million in debt at the end of January) to make some transformational moves to expand beyond just endpoints. 

Last autumn the company purchased small start-up Preempt Security to bolster its zero-trust access management solutions. And its more recently announced $400 million acquisition of Humio has the potential to open massive new markets for CrowdStrike. Humio is a cloud-based log management and observability outfit (think Splunk, Datadog, or Dynatrace). This is a big industry, one becoming increasingly important as more organizations adopt cloud computing. Log management helps companies monitor their cloud computing operations and detect problems and unauthorized access. Combining Humio with CrowdStrike's existing AI-enhanced threat detection greatly expands on the company's capabilities.

Granted, management expects Humio to contribute just $2 million to ARR in the first quarter. It's unlikely the established leaders in the log management, analysis, and cloud observability industry will start bumping into CrowdStrike anytime soon. But this is nonetheless a large and fast-growing new segment of security to help CrowdStrike continue its impressive streak. This firm can no longer be pigeonholed as an endpoint security firm that will quickly flame out. CrowdStrike has put on some serious muscle, and it is using it to enter new areas of the cybersecurity world. 

Investor takeaway

If volatile share prices equal risk in your mind, CrowdStrike may not be for you. Big swings up and down are the norm for high-growth and "expensive" stocks like this one. Nevertheless, the premium is there for good reason. CrowdStrike is on a tear, one poised to continue as the company hunts down new business at a rapid pace.