The concept of cybersecurity isn't all that new. Companies have been battling to keep data secure for decades. But as companies of all sizes collect increasing amounts of data for analysis that's vital to the businesses, IT leaders are increasingly investing in new, innovative solutions to keep this data secure.
As corporations around the globe embrace remote work, the number of company-issued devices such as mobile phones, tablets, and laptops will increase. In the cybersecurity realm, these devices are referred to as endpoints. IT leaders now face increasing pressure to identify cloud-native security protocols over legacy, on-premise network protection due to the nature of remote work.
Data security specialist CrowdStrike (CRWD 0.13%) is a cybersecurity innovator specializing in this endpoint security and cloud-native applications. It also happens to be one of the dozens of tech stocks that have experienced heavy sell-offs in recent months due to a market-wide move toward value stocks. The company's prospects for growth haven't changed, despite the sell-off, and this may present an interesting investment opportunity at its current valuation.
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Top-notch financial performance
CrowdStrike recently reported its fiscal 2022 fourth quarter and full fiscal earnings results. For the fiscal year (ended Jan. 31) CrowdStrike reported total revenue of $1.45 billion, which was a 66% increase. The company's robust revenue growth also helped contribute to rising cash flows.
For the fiscal year, CrowdStrike reported operating cash flow of $574.8 million, compared to $356.6 million in fiscal 2021. Moreover, the company's free cash flow was $441.8 million, compared to $292.9 million in fiscal 2021.
This increase in cash flow has provided the company with ample financial flexibility. More specifically, when CrowdStrike went public in 2019, the company primarily focused on endpoint security and offered customers 10 separate solutions, dubbed modules. Today, CrowdStrike provides 22 different modules spanning different facets of cybersecurity including cloud security, threat intelligence, managed services, and identity protection, among others.
CrowdStrike has done a great job illustrating to investors that it can move swiftly past larger, incumbent security providers and continue to gain market share in the endpoint security market as well as other adjacent segments of cybersecurity.
Industry tailwinds could just be getting started
Prior to the pandemic, it was not uncommon for companies to invest heavily in on-premise network security solutions. However, since it was founded in 2011, CrowdStrike has been working on educating the market on cloud-native architectures. It could be argued that legacy cybersecurity players such as Microsoft, Alphabet (GOOG -1.96%) (GOOGL -1.97%), Amazon, Palo Alto Networks, McAfee, and others ended up offering compromised solutions by focusing on the on-premise network, and are now struggling to develop cloud-hosted or hybrid models.
The potential of cloud security can be seen in a report from investment firm IDC, which estimates cloud IT spending will exceed $217 billion by 2023. However, investments in cloud security spending right now among various companies in the cloud is only about $2 billion (roughly 1% of the total market). IDC suggests that organizations should be devoting about 5% to 10% of IT budgets toward security. That suggests significant underinvestment that needs to be corrected. It also suggests a significant growth opportunity for CrowdStrike. By assuming IDC's 2023 estimate of $217 billion, a 5% investment in cloud security would equate to roughly $11 billion of additional revenue up for grabs by CrowdStrike and its competitors.
It will likely help CrowdStrike's efforts to gain this added spending to know that Forrester Research named CrowdStrike as its top endpoint detection and response provider, over the likes of Microsoft, McAfee, and SentinelOne.
CrowdStrike's positive momentum surely has not gone unnoticed in the marketplace. For example, within the last year, Microsoft has acquired two cybersecurity companies: RiskIQ and CloudKnox. Amazon, for its part, acquired security specialist Wickr, while Alphabet has announced two acquisitions this year: Siemplify and Mandiant (MNDT).
It would be short-sighted to say that these FAANG counterparts simply acquired cybersecurity companies. The common denominator among these acquisitions is that the underlying products and services from the targets will be integrated into each company's respective cloud offering. What this means is that Microsoft, Amazon, and Alphabet are now moving quickly to identify cloud-native solutions that can be rolled into existing cloud infrastructure in an attempt to catch up to players such as CrowdStrike.
If the strategic acquisitions in the cybersecurity space were not enough to encourage investors about the future prospects for CrowdStrike, it should also be noted that the company recently announced a strategic alliance with Mandiant. Under the terms of the deal, Mandiant will leverage CrowdStrike's Falcon platform for its incident response services. This collaboration speaks volumes to CrowdStrike's power and position within the cybersecurity fabric. Moreover, it could be a lucrative growth driver for both CrowdStrike and Alphabet, which announced its intent to acquire Mandiant in March.
Keep an eye on valuation
Since its initial public offering (IPO) in July 2019, CrowdStrike stock is up a whopping 240%. Given the rising demand for cloud-native security solutions during the pandemic, the company has experienced dramatic increases in its top line and shareholders subsequently rewarded the stock.
Between the time it reported its fiscal Q3 results in December 2021 and its full-year results in March, CrowdStrike's stock fell about 15.7% to around $170 per share. Like many of its counterparts in the technology arena, CrowdStrike experienced heavy selling activity during the final months of 2021 and early 2022.
Since reporting Q4 earnings roughly one month ago, CrowdStrike stock is up roughly 14%. With the recent stock price run-up, CrowdStrike currently trades at a price-to-sales ratio of 34. By comparison, the company was trading at nearly 61 times price-to-sales in January 2021.
Investors should be encouraged that technology giants like Microsoft, Alphabet, and Amazon are investing more aggressively in cloud-native cybersecurity. Despite its recent run-up, CrowdStrike's current valuation seems appealing compared to its prior trading levels. Given the tailwinds in the cybersecurity and cloud landscapes as a whole, now could be an interesting time to initiate a position in CrowdStrike for long-term investors.
