As sell-offs in technology and growth stocks continue, investors may be disoriented or feel unenthusiastic about deploying capital to buy dips that just seem to keep dipping. One industry that may be a solid investment choice both in the intermediate and long-term is cybersecurity. In 2022 alone, the cybersecurity market has already witnessed two large acquisitions by Alphabet. Even more recently, private equity giant Thoma Bravo sold network security provider Barracuda Networks to KKR.
CrowdStrike (CRWD 0.99%), the cloud-native cybersecurity company, was a prominent pandemic darling: its stock rocketed 258% between January 2020 and December 2021. But since hitting an all-time high in November, the stock has since cratered more than 30%.
Despite the precipitous sell-off, CrowdStrike has benefitted from a number of Wall Street analyst upgrades. Let's take a look at where Wall Street's predictions are coming from and what they might mean for this stock.
Don't miss the forest for the trees
In a research note to investors, investment bank Goldman Sachs (NYSE: GS) highlighted several tailwinds for the cybersecurity industry at large. Goldman specifically called out CrowdStrike as being positioned in the "sweet spot" to benefit from these advantages.Ultimately, the investment firm upgraded CrowdStrike stock from a Neutral rating to a Buy rating and increased its price target from $241 to $285 per share.
Goldman noted that businesses of all sizes have a growing demand for cybersecurity measures. As remote work becomes more standard, company-issued laptops and phones will become increasingly vulnerable. As a result, these devices, known as "endpoints" in the cybersecurity world, will inevitably face more sophisticated cyberthreats. Information technology (IT) leaders are beginning to shift their focus beyond on-premise network solutions, increasingly turning to more cloud-based protocols like CrowdStrike.
In a recent presentation to investors, CrowdStrike's management attempted to quantify this paradigm. According to research firm IDC, cloud IT spending should exceed $217 billion by 2023. Of particular interest: that same IDC research suggests that current investments in cloud security spending are roughly $2 billion, or 1% of the total market. Yet, IDC estimates that companies should allocate between 5% and 10% of IT budgets toward security. This implied underinvestment could serve as a catalyst for CrowdStrike's growth, pulling in additional revenue for CrowdStrike and its competitors.
Meaningful traction across the board
A more immediate driver of growth for CrowdStrike could be fueled by increased investments by the public sector. In response to the invasion of Ukraine, national security leaders have underscored the rising risk of cyberattacks and are recommending intensified cybersecurity investments.
CrowdStrike is doing its part to help protect companies from potential cybersecurity breaches by partnering with Ping Identity and Cloudflare through the Critical Infrastructure Defense Project, which provides companies free cybersecurity measures for a specified period of time. In addition to its work with the Critical Infrastructure Defense Project, CrowdStrike also recently announced its premier platform, Falcon, will now be used by the Department of Defense and Defense Industrial Base.
If its penetration into the public sector is not enough to encourage investors, CrowdStrike just launched a strategic partnership with Mandiant (NASDAQ: MNDT), which Alphabet is set to purchase for $5.4 billion. As part of the collaboration, Mandiant will integrate CrowdStrike's Falcon infrastructure with its incident response services.
The combination of rising cybersecurity spending augmented by large public sector deals, as well as strategic alliances with FAANG giants, should expand CrowdStrike's total addressable market. Bearing all this in mind, it may not be surprising that management confidently increased its long-term annual recurring revenue guidance to $5 billion by fiscal year 2026 (ending Dec. 31, 2025), up from its previous goal of $3 billion in annual recurring revenue by fiscal 2025. The company now believes it can reach $3 billion in revenue by fiscal 2024, a year earlier than initially expected.
Keep an eye on valuation
CrowdStrike presents a unique investment opportunity at the moment due to its potential intermediate growth prospects as well as its longer-term tailwinds. CrowdStrike currently trades at 37 times its trailing-12-month price-to-sales ratio. By comparison, the company traded at 52 times its trailing-12-month sales exactly one year ago.
The positive notes from Goldman Sachs and other investment firms, as well as key contractual wins in both the public and private sector, should bode well for CrowdStrike in the intermediate term. More importantly, it looks to set the company up for years of long-term growth.