CrowdStrike Holdings, Inc (CRWD +0.77%) provides artificial-intelligence-powered endpoint protection through its security cloud, among other cybersecurity services. Several macroeconomic secular conditions make this a likely long-term winner. First, it seems everyone from the President to small businesses is focused on cybersecurity vulnerabilities, and for good reason.
In 2020 a group of hackers from Russia used a vulnerability in SolarWinds (SWI +0.00%) software to breach a number of United States Government agencies where they accessed data for months. In the wake of this and other attacks, President Biden held a cybersecurity summit at the White House where he stressed a renewed focus in combating such breaches, and signed an executive order mandating action. The private sector is no less under siege with breaches, malware, and ransomware as constant threats. This provides CrowdStrike a secularly favorable market and an impressive $43.6B total addressable market (TAM) by 2023.
Another tailwind for the company has been the fact that the pandemic has accelerated work-from-home trends. Companies with workers off-site must secure additional endpoints and face unique security challenges, and CrowdStrike is expert at addressing these threats. The macroeconomic landscape is ripe for CrowdStrike's technology and its stated mission: "We Stop Breaches."
Source: Getty Images.
CrowdStrike by the numbers
CrowdStrike has some of the best growth stock metrics in the industry. The company has a tremendous gross margin in the 73%-75% range in most quarters. This is a critical metric as a quality gross margin indicates an ability to scale successfully to profitability. Annual recurring revenues (ARR) increased over 70% in Q2 FY22 over Q2 FY21. Total customers increased over 80% in that same period. Customers on average are providing a robust amount of ARR, coming in at over $100 thousand per. The ARR per customer has dipped slightly, however this is expected as new customers come on board. Customers often start using just a few modules and the company is able to upsell as time goes on. This is evidenced by the company's net retention rate over 120%. A net retention rate over 100% means the company is upselling to current customers more than it is losing revenue due to customer turnover.
|
Metric |
Q2 FY21 |
Q2 FY22 |
CAGR |
|---|---|---|---|
|
ARR (millions) |
$790 |
$1,341 |
70% |
|
Customers |
7,230 |
13,080 |
81% |
|
ARR per customer |
$109,267 |
$102,523 |
-6% |
What do all these fuzzy numbers mean? They mean that CrowdStrike is on its way to reaching its target model for profitability. Management has set a target free cash flow (FCF) margin of 30%. At the current recurring revenue level, this would provide more than $400M in FCF per year.
CrowdStrike stock is highly valued on a price-to-sales (PS) basis. The company is sporting a PS ratio of 44 on a forward basis. This drops to only 32x on a forward 1 year basis, however. It is also less than some others in the industry such as Cloudflare Inc (NET 0.44%) and ZScaler (ZS 2.53%). Cloudflare stock chimes in with a forward PS ratio over 97, while ZScaler stock is valued at over 49 times forward PS. CrowdStrike stock is valued highly but is not out of sync with industry norms for growth stage cybersecurity stocks.
What differentiates CrowdStrike?
CrowdStrike's platform provides innovative technology and is integrated with other integral software partners. CrowdStrike's AI threat protection allows for new threats and suspicious malware to be detected autonomously based on machine learning. In simple terms, a machine can identify potentially malicious code even if it has not previously been flagged or studied. The company's threat graph technology stops breaches and maintains data securely in the cloud.
In our connected world, partnerships and integration are critical to success. Integrating with Amazon's (AMZN +1.10%) AWS and Microsoft's (MSFT 0.24%) Azure are critical, and CrowdStrike does just that. The company also partners with Okta (OKTA +0.57%), ZScaler, and ServiceNow (NOW 0.53%) among many others. CrowdStrike has also teamed up with Ernst & Young, one of the "Big 4" accounting firms to thwart ransomware attacks. The two companies have partnered to provide clients with a Ransomware Readiness and Resilience solution. This type of proactive thinking is one reason that CrowdStrike is expanding its customer base so rapidly and will ensure future success.
CrowdStrike will continue to reward long-term investors
Cybersecurity affects everyone in our society and may even be the defining defense issue of our time. The government is taking the threats very seriously and private enterprises are increasing their budgets for cybersecurity. CrowdStrike is at the forefront of cybersecurity technology companies. The corporation is growing rapidly and aggressively with an expanding TAM that allows for decades of runway. The metrics are impressive and the company's technology is integratable and innovative. I believe CrowdStrike will continue to outperform the broader market for the long-term investor.
