With the increaing amount of information given to and held by companies and organizations, security becomes of the utmost importance. From critical infrastructure and governments to small and large businesses, cybersecurity is essential to our daily lives and security. Increased international tensions, the migration to the cloud, increased reliance on digital operations, and the work-from-home trend are catalysts for growth in this already massive market.
Statista estimates that the cybersecurity market will reach $239 billion globally in 2022 and expand to over $345 billion by 2026. Of this, CrowdStrike Holdings (CRWD 0.14%) reports its total addressable market will exceed $54 billion this year and continue to expand.
A critical time for cyber solutions
The Russian invasion of Ukraine has shattered any feelings of the already limited "relative peace" in the world. But let's face it, we are constantly fighting a cyberwar against criminals and bad actors backed by nations. The SolarWinds hack and the Colonial Pipeline ransomware attack are two examples of just the highest-profile breaches. CNET reports a 68% increase in breaches in 2021 over the prior year. After the Russian invasion, big banks in the U.S. and Europe were warned to be hypervigilant for possible cyber aggression. CrowdStrike reports 15 of the top 20 banks as customers, along with more than half of Fortune 500 companies.
Image source: Getty Images.
CrowdStrike uses artificial intelligence and machine learning to provide cloud-based protection against breaches. Its platform monitors endpoints and enables investigation and incident response. Machine learning allows the platform to increase its effectiveness by adapting knowledge from attacks. CrowdStrike's real-time platform updates are critical due to the constantly evolving nature of attacks. Its existence in the cloud makes this possible.
There are currently nine modules on CrowdStrike's Falcon platform, and most customers use at least five. The adoption of additional modules allows CrowdStrike to leverage sales from existing customers. Because of this, the company reports a dollar-based net retention (DBNR) rate of over 120%. Anything over 100% means customers spend more each year, and 120% is exceptional.
CrowdStrike's Q4 and fiscal 2022 earnings
Customer growth is one of the most important metrics for CrowdStrike due to the high DBNR and the nature of subscription revenue. CrowdStrike spends a tremendous amount of money acquiring customers; over 42% of total revenue went to sales and marketing expenses in fiscal 2022, under generally accepted accounting principles (GAAP). Management believes this will pay off handily in the future. Each customer acquired will provide annual recurring revenue (ARR), which will grow over time. In this way, CrowdStrike believes it can scale to profitability.
Thus far, CrowdStrike has had terrific success, as shown below. Total customers have increased exponentially since 2017 and the number of customers added each year is accelerating.
Data source: CrowdStrike. Chart by author.
CrowdStrike's ARR is growing right along with the increase in customers. After reaching $1.5 billion in the third quarter of fiscal 2022, it blew past $1.7 billion in the fourth quarter. Year-over-year ARR was up 65%. Total sales reached $1.45 billion in fiscal 2022, a 66% increase over fiscal 2021. The company is forecasting another 47% increase in sales this fiscal year for a total of $2.13 billion to $2.16 billion. The company is also in good shape on its balance sheet with $2 billion on hand in cash and equivalents and $740 million in long-term debt as of the end of fiscal 2022.
CrowdStrike's stock price
Growth stocks have been decimated over several months, and CrowdStrike is no exception. The stock currently trades 36% down from its 52-week high. However, it received a boost from earnings and is only down about 8% year to date, against a nearly 20% decline in the Nasdaq Composite. The stock is trading at a price-to-sales ratio of just over 20 on a forward basis, its lowest valuation in well over a year.
Inflation and the war in Ukraine have rightfully spooked the markets. Because of this, the short-term movements of CrowdStrike stock and the overall market are even more dicey than usual. This growth stock may not be suitable for risk-averse investors or those with a short timeline. But, long-term shareholders could see market-beating returns in the years to come.
