CrowdStrike (CRWD 1.68%), one of the hottest cybersecurity stocks of 2019 and 2020, cooled off significantly this year. CrowdStrike ended 2020 at $211.82 per share -- 523% above the price of its IPO in June 2019 -- and hit an all-time high of $298.48 this November. But over the past month, it retreated more than 30% to about $200 per share.
CrowdStrike's growth rates are still healthy, but its high valuations left it exposed to the inflation-induced sell-off in higher-growth tech stocks. But as those nervous investors fled, I initiated a position in CrowdStrike, because I spotted seven green flags that clearly indicate it's a solid investment.
Image source: Getty Images
1. It's still a disruptive market leader
Many cybersecurity companies install on-site appliances to power their endpoint protection services. However, those appliances can be difficult to maintain, update, and scale as a company expands.
CrowdStrike eliminates the need for on-site appliances because its Falcon platform is a cloud-native service. It currently offers 21 different cloud modules, and aims to tether new customers to one or two modules before cross-selling additional ones with a "land and expand" strategy.
Earlier this year, Gartner named CrowdStrike as a market leader in its annual Magic Quadrant for Endpoint Protection Platforms report for the second straight year. That rising profile indicates CrowdStrike is becoming a disruptive force in the crowded cybersecurity market.
2. It's gaining a lot of customers
CrowdStrike ended its latest quarter with 14,687 subscription customers. That's up 75% from 8,416 subscription customers a year earlier. Back in Jan. 2019, it only served 2,516 subscription customers.
3. Those customers are using more modules
CrowdStrike continues to add more modules to Falcon. Its subscription customers also continue to use more of those modules, on both a sequential and year-over-year basis:
|
Period |
Q3 2021 |
Q2 2022 |
Q3 2022 |
|---|---|---|---|
|
4+ Modules |
61% |
66% |
66% |
|
5+ Modules |
44% |
53% |
55% |
|
6+ Modules |
22% |
29% |
32% |
Source: CrowdStrike Company Filings.
Those rising module adoption rates indicate CrowdStrike's "land and expand" strategy is paying off and boosting its revenue per customer.
4. Healthy retention rates
CrowdStrike's dollar-based net retention rate, which reflects its ability to generate higher revenue from its existing customers, has stayed above 120% (its "benchmark" level) since its IPO more than two years ago.
5. Explosive revenue growth
CrowdStrike's rapid customer growth, its rising module adoption rates, and its high retention rates enable it to generate very impressive revenue growth.
Its revenue soared 93% in fiscal 2020, grew 82% in fiscal 2021, and increased another 67% year over year in the first nine months of fiscal 2022. It expects its revenue to grow 63%-64% for the full year.
Next year, analysts expect CrowdStrike's revenue to rise 40% to $2 billion. Its revenue growth is gradually decelerating, but a mid-term annual growth rate of 30%-40% would still be pretty impressive.
6. Stable gross margins
The bears will point out that CrowdStrike is still unprofitable on a generally accepted accounting principles (GAAP) basis, and its net losses widened significantly in the first nine months of fiscal 2022.
However, the gross margins of its subscription business remain stable on a GAAP basis, and are expanding on a non-GAAP basis:
|
Subscription Gross Margin |
FY 2020 |
FY 2021 |
9M FY 2022 |
|---|---|---|---|
|
GAAP |
74% |
77% |
76% |
|
Non-GAAP |
75% |
79% |
79% |
Source: CrowdStrike Company Filings.
Those stable margins indicate CrowdStrike still has plenty of pricing power in the cloud-native cybersecurity market, even as it faces tougher competition from AI-powered platforms like SentinelOne's (S 2.03%) Singularity and Palo Alto Networks' (PANW 1.31%) Cortex.
7. Its valuations are cooling off
CrowdStrike has never been a cheap stock. On its first day of trading, the stock soared 71% to $58 per share and boosted its market cap to $11.4 billion -- 24 times the revenue it eventually generated in fiscal 2020.
Today, CrowdStrike is worth $45.6 billion, or 23 times next year's revenue. Therefore, its forward price-to-sales (P/S) ratio has actually cooled off slightly, even though its stock has more than tripled since its first trading day.
Investors who fretted over CrowdStrike's valuations after it went public missed out on some massive gains, and I think it now looks reasonably valued relative to SentinelOne, which trades at 36 times next year's sales.
CrowdStrike is still a lot pricier than Palo Alto Networks, which trades at eight times next year's sales, but it's also growing at a much faster rate.
CrowdStrike still has a bright future
CrowdStrike's stock will remain volatile in the near term as concerns about inflation and interest rates rattle pricier growth stocks.
But over the long term, I believe CrowdStrike still has plenty of room to grow. That's why I'm accumulating more shares of this high-growth cybersecurity company as the less patient investors head for the exits.
