Cybersecurity has become increasingly important over the past few weeks. In fact, Google Trends reveals that the search term "cybersecurity" is over 50% more popular than it was one year ago. Clearly, the cyberattacks associated with the Russian-Ukraine conflict impact these results, but it still doesn't undermine the importance of having a proper security solution.
With how integrated the world has become, every business needs a robust cybersecurity plan to prevent enemies -- whether terrorists, individuals, or another country -- from accessing vital information and infrastructure. While there are several potential investments in the cybersecurity realm, none excites me more than Crowdstrike (CRWD 1.69%). The leader in endpoint protection offers its software through the cloud and is proven to prevent many of the types of cyberattacks seen in recent events.
Image source: Getty Images.
Customers are utilizing Crowdstrike's products more
Crowdstrike's primary offering is its Falcon platform. The cloud-delivered software prevents attacks and continuously improves the platform by analyzing the more than 1 trillion events captured every day across all customers. And that is just the beginning of its product span, as Crowdstrike offers more than 20 other modules like firewall management and malware search. Most customers tend to use multiple modules, and Crowdstrike has seen expansion with how many modules are used.
| As of Date | 4 or More Modules | 5 or More Modules | 6 or More Modules |
|---|---|---|---|
| Jan. 31, 2022 | 69% | 57% | 34% |
| Jan. 31, 2021 | 63% | 47% | 24% |
Data source: Crowdstrike. Chart by author.
If Crowdstrike's modules weren't effective, customers wouldn't be adding more of them; they'd be switching providers.
One form of malware seen in Ukraine is a wiper malware Crowdstrike refers to as DriveSlayer. While this attack can delete critical files and render a computer useless, Crowdstrike prevents this attack so that customers can rest easy, even with the threat of this type of cyberattack looming.
Strong growth and free cash flow
The actual product offering from Crowdstrike is best in class, but its financials really sell the stock as an investment.
For its 2022 fiscal year (ended Jan. 31, 2022), Crowdstrike reported revenue of $1.45 billion, up 66% from last year's total. Fourth-quarter 2021 customers spent, on average, 24% more than last year (including those who left and now spend nothing), and Crowdstrike retained 98.1% of all Q4 2021 spending in Q4 2022, showing it keeps customers well. It also added 1,638 net new customers in the quarter, growing 65% over last year's number.
Crowdstrike is doing a great job of acquiring new customers and expanding the spending with existing ones, making it one of the fastest-growing companies in the market today. However, growth isn't at the top of the market's wish list right now, so how does it stack up on the profitability side?
While not GAAP (generally accepted accounting principles) profitable, Crowdstrike posted full-year non-GAAP net income per share of $0.67, up 148% from $0.27 last year. From the GAAP perspective, Crowdstrike lost $1.03 per share. The difference between these two numbers is largely stock-based compensation, which Crowdstrike spent $310 million on throughout the fiscal year 2022.
Looking at free cash flow reveals a self-funding business, as Crowdstrike converted 30.5% of revenue into cash for a total of $442 million for the year. While this won't win much enthusiasm from the market, Crowdstrike will be able to continue operating without needing to go to the market for extra funding, allowing it to survive a downturn in the economy.
Image source: Getty Images.
Strong guidance with a history of beating expectations
Management's FY 2023 revenue guidance is $2.15 billion at the midpoint, which would be a 48% growth rate over FY 2022. While this is a great outlook by itself, management consistently blew its own projections out of the water in the last two years.
| Fiscal Year Guidance | Original Guidance | Actual Result | Beat |
|---|---|---|---|
| 2022 | $1,315 M | $1,450 M | 10% |
| 2021 | $728 M | $874 M | 20% |
Data source: Crowdstrike. Chart by author.
With a solid track record of guidance-beating reports, investors can expect the business to exceed the stated expectations, especially if the geopolitical climate remains in disarray. Remember, that tension often drives more business to cybersecurity experts such as Crowdstrike.
Compared to its cybersecurity peers, Crowdstrike has seen an extreme valuation decline but is also valued the lowest when assessed from a free cash flow perspective.
CRWD PS Ratio data by YCharts.
This is an expensive price to pay for any stock -- 29 times sales and 98 times free cash flow is by no means cheap -- but investors must pay up if they want to own a best-in-class cybersecurity company with huge growth ahead of it.
In my opinion, there really isn't a greater growth stock available right now than Crowdstrike. It has both headline and industry tailwinds, maintains customers and adds new ones consistently, is profitable from a cash flow basis, and is well off its valuation high. Over the next decade, I expect Crowdstrike to extend its market leadership and capture nearly every major business available. It already has 65 of the Fortune 100, 254 of the Fortune 500, and 15 of the top 20 banks subscribed to its software, making it the clear industry leader.
Crowdstrike appears to have a tremendous hold on the cybersecurity industry. With continued customer expansions and adoption, it will be one of the best stocks to own for the next three to five years and beyond. Consider grabbing some shares today, down around 35% from the all-time high.
