Defending ourselves from cyberattacks has moved well beyond the antivirus software that you used to install on your PC. Crowdstrike (CRWD +0.46%) protects its customers in the cloud, where the digital world is migrating. While the stock is already up more than 140% over the past year, here are four reasons why Crowdstrike is poised to keep winning for investors.
1. The demand for cybersecurity is only growing
As the global economy goes increasingly digital, businesses are not keeping up with their cybersecurity needs. Crowdstrike estimates that in 2020, global cloud IT spending surpassed $100 billion, yet just 1.1% of that went toward cloud-based security to protect those workloads. Crowdstrike believes that cloud security spending could eventually expand to 5% to 10% of a company's IT budget.
Cybersecurity breaches can wreak havoc on businesses. In May, hackers shut down the Colonial pipeline, the largest petroleum pipeline in the United States, costing the pipeline's parent company tens of millions of dollars in shutdown expenses on top of the ransom it paid.
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President Biden has called for significant investments into cybersecurity, because the potential for a government-level breach is a national security concern. In 2020, one research group valued the global cybersecurity market at $167 billion, and estimated it will grow at a 10.9% rate through 2028.
2. Crowdstrike's "live" network brings network effects
Security companies call software installed on your own computer -- such as traditional antivirus software -- "on-premise." But on-premise security isn't always effective, because it can only learn about new threats when the antivirus company issues an update.
Crowdstrike's Falcon Platform provides real-time protection by operating on the cloud instead of on-premise. The devices connected to Crowdstrike form a "live" network that can recognize, block, and learn from threats.
Crowdstrike's artificial intelligence could detect an attack in Colorado, learn from it, and instantly improve itself to protect a computer in Florida from a similar threat, even if that attack had nothing to do with the original one. More customers mean more connections on the network, experiencing more threats, making the Crowdstrike platform better. And since it records nearly six trillion events per week, Crowdstrike's platform is always learning.
3. Stellar financials to support growth
Crowdstrike runs a subscription-based business model, so it's important to look at its recurring revenue. That figure's growth signals that Crowdstrike is successfully winning customers' business -- and Crowdstrike has grown its annual recurring revenue at a rate of 74% since 2018.
In its fiscal 2021, Crowdstrike grew recurring revenues 84% year over year to $804.7 million while generating free cash flows of $292.9 million. Its 2021 non-GAAP net income of $62.6 million marked the company's first profitable year.
Management is guiding revenue to grow 48.5% this year to $1.3 billion, resulting in non-GAAP income between $83.1 million and $97 million. Crowdstrike currently has cash on hand of $1.6 billion. With a profitable business and deep pockets, Crowdstrike has the financial tools to keep funding the innovation that helps it grow.
4. Innovation that drives growth
Crowdstrike sells different types of protection as what it calls "modules," consistently adding more over time -- from 10 modules at its May 2019 IPO to 19 just two years later. This product expansion helps encourage customers to increase spending on the platform; existing customers have spent at least 120% more year over year in every quarter going back to Q4 2018. Approximately 64% of subscription customers use at least four modules.
Adding new modules also expands Crowdstrike's addressable market. Management estimates that its addressable market has grown from $25 billion in 2019 to $36 billion in 2021 and will grow to $44 billion by 2023. Research firm Gartner has given Crowdstrike high marks as an industry leader in cybersecurity for its continuous product development.
Crowdstrike operates in a very competitive field, with direct cybersecurity competitors such as SentinelOne and legacy companies that sell traditional security products. Crowdstrike has patent protection for its threat graph, which maps connections on the Falcon Platform, and the company's consistent innovation has enabled it to thrive thus far. Cybersecurity stock investors will want to ensure that Crowdstrike continues expanding its modules to maintain its leadership in the space.
