What happened
Shares of cybersecurity specialist CrowdStrike Holdings (CRWD -3.78%) lost 11.8% of their value in January, according to data by S&P Global Market Intelligence. There was no company-specific news to cause the drop. Rather, it was the general market malaise that kicked off the new year as investors feared rising inflation and a Federal Reserve determined to hike interest rates to combat rising prices would lead the economy into a recession.
Whether or not a market crash is likely, investors shouldn't worry too much about the impact on CrowdStrike's business. Hackers and cybersecurity threats have become a fact of life.
Image source: Getty Images.
So what
CrowdStrike's decline actually began well before Jan. 1, back in November when the market began a sector rotation out of high-flying tech stocks and shares that had prospered during the pandemic and into more consumer durable goods. From its high point until today, CrowdStrike shares are down 41%.
A lot has to do with the fact the cybersecurity specialist is not a cheap stock. Shares trade for 28 times sales and 86 times the free cash flow it produces. That led a Morgan Stanley analyst to initiate coverage by saying it had an "unfavorable risk-reward ratio" as the competitive field expands.
Yet the proliferation of cybercrime can justify the valuation. The Theft Research Center says the number of data breaches recorded in 2021 surpassed the previous year by 17% at the end of September, with still three months to go at the time. There's probably plenty of business for everyone.
Now what
CrowdStrike is a leader in the space. Its Falcon architecture manages and monitors trillions of potentially adverse online events every week. Its corporate customers have found value in its system and are signing up at an escalating rate, with the subscriber base growing from 450 clients five years ago to over 13,000 today. It also has an almost 100% renewal rate for its service subscriptions.
It's true the cybersecurity space is getting more crowded, but the total addressable market is expanding, meaning downturns like CrowdStrike is currently experiencing will likely be short-term in nature.
