In a recent episode of The Rank, a panel of Fool.com contributors ranked seven top cybersecurity companies and CrowdStrike (CRWD +0.01%) was the clear winner. In this Fool Live clip, recorded on May 25, hear Fool analyst Tim Beyers, chief growth officer Anand Chokkavelu, and Fool.com contributor Matt Frankel discuss why they have such a positive opinion about this cloud-based cybersecurity business.
Anand Chokkavelu: CrowdStrike, No. 1, CRWD. CrowdStrike wants to own the security cloud, just like your salesforce.com again, owns the CRM Cloud. Tim mentioned Palo Alto Networks) being a Salesforce in terms of how they acquire things and put things together. CrowdStrike wants to own the security cloud in Salesforce-like fashion. Everyone mentioned Salesforce because it was such a pioneer in the cloud space. Its CrowdStrike Falcon platform uses Cloudforce data and AI to go on the offensive against what they call adversaries, people trying to infiltrate networks, to anticipate and/or quickly detect threats. George Kurtz is the CEO and co-founder of CrowdStrike, founded in 2011. Got 7% of shares outstanding, so good amount of skin in the game. He was at McAfee before this and he was at McAfee because in 2004, they bought a security company that he founded, and so he worked at McAfee for like seven years and then founded CrowdStrike. He's got a lot of experience in the space. In the endpoint protection platform space, this is that endpoint, the device level that Tim was talking about earlier, it gets love from Gartner both on completeness of vision and ability to execute. Up and to the right. It's right up there with Microsoft, basically. Those are the two at the top right. But this is a pure-play versus Microsoft. If we looked at some numbers that are impressive, the gross retention rate is 98%. This is, if you had 100 customers, 98 are with you the next year. Then not only do they keep those customers, they're doing that land-and-expand strategy that all the SaaS companies want and love. Their dollar-based net retention routinely exceeds 120%. It's the largest grower in this group over the past year at an 82% growth rate, that's why we're talking about Palo Alto's 22% being good, but compared to 82%. The fly in the ointment as it is with a lot of these company's evaluation. We talked about Okta being in the 40/40 Club, this one is in the 50/50 club. Market cap is around $50 billion, price to sales is around 50. Valuation is the tough part here on CrowdStrike. Anything to add?
Tim Beyers: Then I want to hear from Matt on this. It's a very high-quality business. One of the things it does really well is it compounds cash flow at a very high rate, and the way that it does that is it rights contracts and it gets a lot of deferred revenue that's feeding that cash flow. It's not just all stock-based comp and artificial sweetener, they're writing some big contracts. Part of the reason that's happening is because CrowdStrike sells according to the number of modules that you adopt. So the biggest customers are adopting many modules, I think there's a large portion of their customer base has four or more modules, I think they have 19 modules now. The more modules you adopt, which are basically functions, it's a security function that is a module that you turn on a part of the CrowdStrike platform and then you pay for that service and that's part of your contract. So that's pretty big. There is one, and then I'll kick it to Matt here, but there was a question from Deutsche Route, which is a really good one that I wanted to answer. You say, "I heard you say a few weeks ago that Crowd will never be cheap to deploy due to something about its architecture design and data storage." Basically, what this is, so you've heard Anand and talk about how they're looking for signals and they go on the attack and they're doing all the stuff. They have a massive data lake. If you don't know what a data lake is, think about the giant warehouse at the end of Raiders of the Lost Ark with just the army is stuffing everything in there. There are no shelves, just everything goes in there. It's not organized, just big blob of stuff. That's a data lake. You just throw anything in there. Then in order to get some intelligence out of that, you take that stuff and you start running some analytics on it. Say like, "OK, what am I seeing here based on this blob of info that we've got?" CrowdStrike is a really big data lake, and they're sharing data with Zscaler, they're a data partner. Zscaler (ZS +1.35%) and CrowdStrike are data partners. There is an argument to be made that CrowdStrike may have the best intelligence about what's happening out in the world as far as security threats go. They're not the only ones that do this. Basically, everybody has got a data lake. It's just possible that CrowdStrike's is bigger and better than others. But think about what it takes to run a data lake. You're running this on another cloud platform, you're paying for that cloud platform, and you're going to pay more as the data lake grows and as you start running, compute against it to do analytics. It's just like the bigger and the harrier this thing gets, and the more jobs you run against that data, the more internally CrowdStrike is spending, which means it will forever be a premium product. It will have to be priced at premium forever. The only question is, is CrowdStrike deserving of that price premium? If it is, I think this is going to be a winner for a really long period of time. If it's not and somebody comes in and says, "We can do that but at half the cost or a third of the cost," that will be a problem for CrowdStrike. It's not without risk. But Dwight, that's the technical analogy answer to the question. Matt, I'm sorry, I droned on too long.
Matt Frankel: No, it's fine. You actually covered a lot of what I was going to say. The data lake just becomes more exponentially more valuable as this grows. Just to put some numbers behind that, because out of the three of us, I consider myself to be the most value investor at heart, and a 50 times sales multiple would send a value investor jumping out the window. But having said that, when you look at this data lake just growing and becoming more valuable, best dollar net expansion rate of all these 125%, and over 100% since January 2016, that's a pretty impressive streak. Their subscription customers have grown from about 1,200 in 2018 to 8,400 today at 108% annualized growth rate in subscription revenue. Annualized, that means on average, their subscription revenue has more than doubled each of the past three fiscal years.
Chokkavelu: Those rice grains on a chess board type of thing? Double on top of double.
Frankel: Yeah, you're doubling on top of doubling on top of doubling. With that growth rate, a 50 times sales multiple doesn't scare me as much, and especially when that growth makes the product itself more valuable. Why is the iPhone so valuable? A lot of it has to do with the fact that everyone uses them. There's such an ecosystem there. Same idea like the bigger Apple's ecosystem gets, the more valuable their products become to their users, and the same can be said about CrowdStrike.
