CrowdStrike (CRWD -3.67%) was one of the hottest stocks in 2020 after its scorching hot return of over 300%. The company specializes in cloud workload and endpoint security, assisting enterprises with threat intelligence and cyberattack response services. According to a recent report published by PricewaterhouseCoopers, 69% of respondents predict an increase in cybersecurity spending for their organizations in 2022. Meanwhile, Gartner estimates that spending for information security will increase to $172 billion in 2022 from $155 billion in 2021.
Although these trends appear attractive on the surface for CrowdStrike, it also means that the company needs to ratchet up its efforts to thwart competition. CrowdStrike's latest earnings report was rife with a number of encouraging metrics, yet the stock retreated from its year-to-date gains after falling 23% in November and sinking an additional 8% in December. As 2021 draws to a close, let's dig in and see if CrowdStrike stock is poised for a comeback in 2022.
The competitive landscape is tough and it's only growing
The advent of enterprise mobility and 'bring your own device' protocols are changing the modern work environment. Although responding to email on a mobile device or accessing sensitive files on a personal tablet allow for efficiencies and increased productivity, these developments come with risk. As more devices connect to corporate servers and have access to private information, more endpoints are inherently at risk of cyberattacks.
The growing addressable market has allowed new providers to enter the market and grab share away from industry incumbents. CrowdStrike has proven that it's on a mission to be the leader in endpoint security over legacy vendors such as Microsoft, Broadcom, or McAfee. Per the company's filings, it touts over 60 of the Fortune 100 and nearly half of the Fortune 500 as customers. Moreover, data from IDC suggests that CrowdStrike holds the largest position in the top five vendors for endpoint security market share with 12%.
As an investor, it's nice to see a company thrive in an expanding sector and build a robust customer base. However, the competitive landscape is heating up and CrowdStrike's management is making sure that it continues to be viewed as a best-in-class solution.
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The difference between a Fiero and a Ferrari
In fiscal Q3, CrowdStrike reported total revenue of $380 million, representing 63% year-over-year growth. Management provided guidance of $1.4 billion in total revenue for the year, which would imply 64% year-over-year growth compared to calendar 2020.
At first glance, this magnitude of growth would not exactly imply panic for most investors. However, CrowdStrike's management has been peppered with questions from Wall Street analysts about a new industry threat since its IPO in mid-2021, SentinelOne.
SentinelOne reported revenue of $56 million in Q3, representing 128% year-over-year growth. However, its annual recurring revenue of $237 million is much smaller than CrowdStrike's $1.5 billion.
Despite its smaller market position, SentinelOne's lower-cost solution and triple-digit revenue growth have analysts questioning CrowdStrike's future prospects. When asked about SentinelOne by Bank of America analyst Tal Liani, CrowdStrike CEO George Kurtz said that with low-cost options, you get what you pay for. "There's a difference between a Fiero and a Ferrari," said Kurtz. "We happen to be the Ferrari model, and that's what a lot of customers want."
CrowdStrike is positioning itself as a pricier solution. With more than 14,500 total customers including Goldman Sachs, ADP, and Sony, it is hard to see how SentinelOne and its 6,000 customers will challenge CrowdStrike for the top position in endpoint security. During the Q3 earnings call, Kurtz highlighted CrowdStrike's value proposition over SentinelOne:
We also landed a record number of wins and displacements over a recently public next-gen vendor, SentinelOne. Just a few months into their multiyear contract with the other vendor, this organization realized the product failed to scale, cause major performance issues, prohibited critical processes from functioning properly, and drove significant friction within the organization and its subsidiaries. That is when they turned to CrowdStrike, purchased multiple modules in a multimillion-dollar ARR [annual recurring revenue] deal, and realized immediate improvement, gaining up to 30% performance increase on their servers alone and greater efficacy without intrusive false positive.
Keep an eye on valuation
CrowdStrike is trading at 35 times price to sales ratio compared to SentinelOne's 97 times. Despite 60% revenue growth in calendar 2021, CrowdStrike stock retreated from its gains and will end the year up about 5% while SentinelOne is up roughly 20%.
With a larger market share, significantly higher revenue, more customers, and a more attractive valuation, now may be a good time to think about adding CrowdStrike to your portfolio and holding on for the long-term.
