This stock is off to a rough start in 2022 as growth stocks have been hammered by a more hawkish Federal Reserve amid rising inflation. Still, cybersecurity remains one of the most significant threats of our time, and this company is growing fast and developing clout.
CrowdStrike (CRWD 4.21%) stock is up more than 300% since Jan. 2020. However, the last month saw a steep decline from the stock's highs. It now trades well over 35% off its 52-week high. The big question is, where does it go from here?
The bear case
There is no doubt that CrowdStrike has made great strides and is growing fast; however, there are three main reasons the stock will decline from here. First, the competition is heating up in the space. SentinelOne (S 7.21%) is one of CrowdStrike's direct competitors. SentinelOne went public in June 2021 and is growing faster than CrowdStrike. For the nine months ended Oct. 31, 2021, SentinelOne's revenue of $139 million was 120% higher than it was for the same period of 2020. This is much faster growth than CrowdStrike.
Alphabet (GOOG 2.65%) is also looking to expand its offering with its recent acquisition of the cybersecurity company Siemplify. The competition is likely to intensify in this arena, which could potentially hinder CrowdStrike's results.
The second reason to be bearish on CrowdStrike stock is its high valuation. The stock is currently trading at a price-to-sales (P/S) ratio of over 32. This is high even for a fast-growing company. It is also much higher than more established and profitable companies like Fortinet (FTNT 0.99%) and Palo Alto (PANW 3.19%) which trade at forward P/S ratios of 13 and 10, respectively. If inflation trends don't reverse in 2022, stocks valued like CrowdStrike could be further damaged by faster-than-expected rising interest rates.
Lastly, CrowdStrike is not profitable. For the nine months ended Oct. 31, 2021, the company lost over $119 million from operations. This is up from a $77 million loss for the same period in 2020. The increasing losses are disquieting to investors looking for the company to show signs of scaling to profitability.
The bull case
CrowdStrike is growing revenue at an incredible clip. For the nine months ended Oct. 31, 2021, the company posted $1.0 billion in total sales against $609 million for the same period in 2020. This is an increase of 67%. Yes, SentinelOne is growing faster on a percentage basis. But, CrowdStrike added much more revenue year over year in total: $411 million to $76 million.
CrowdStrike also surpassed the $1.5 billion in annual recurring revenues as of the last reporting period. This growth could easily continue for many years as the company reports a potential total addressable market of $116 billion by 2025.
The company also has a highly scalable business model despite posting losses currently. CrowdStrike is forgoing profits in the short term by spending much of its revenue on sales and marketing. This spending is paying off now with increases in customers and revenues and will continue to pay dividends in the future.
CrowdStrike's net retention rate of well over 120% shows that customers spend more with the company over time. This is because customers tend to add more modules to their subscriptions. The sales and marketing spending is prudent at this time to ensure long-term success. In addition, CrowdStrike has a gross subscription margin nearing 80%, pointing to scalability over time.
Finally, CrowdStrike is recognized in the industry for excellence. CrowdStrike is a clear leader in the Gartner Endpoint Protection Platform Magic Quadrant. Furthermore, the company was recently selected by the United States Cybersecurity and Infrastructure Security Agency (CISA) to assist in protecting the country's critical endpoints and workloads. Clearly, there is a good reason that, as of Q3 fiscal 2022, 14,687 customers subscribed to CrowdStrike's services.