Sophisticated criminals are extracting more tax-free payments from businesses that aren't always quick to admit their problems to authorities. If the amount being reported is any indication, though, the cybersecurity industry is a great place to find stocks that can outperform the rest of the market.
Shares of CrowdStrike (CRWD +2.08%) have been beaten down around 40% from their peak in 2021. If you missed out on this stock's previous gains or you're just noticing it for the first time, now is a good time to buy for at least three good reasons.
NASDAQ: CRWD
Key Data Points
1. A high-growth industry
During the five-year period from 2017 through 2021, the number of complaints lodged with the FBI's Internet Crime Complaint Center soared 180% to 847,376. Reported losses over the same period exploded by 393% to reach $6.9 billion.
Cybercrime is proliferating rapidly, but CrowdStrike is growing even faster. During the company's fiscal first quarter ended April 30, 2022, revenue soared 61% year over year to $302.8 million. On a longer timeline, revenue has exploded by a whopping 555% since the company made its stock market debut three years ago.
Image source: Getty Images.
2. A more attractive price
Crowdstrike's stock trades at a premium valuation because investors anticipate enormous cash flows far into the future. Unfortunately, rising interest rates lower the present-day value of future cash flows, and nobody knows just how far the Federal Reserve will have to raise rates to curb soaring inflation.
Whether you expect rates to rise further, stabilize, or shrink, CrowdStrike's recent valuation is still more attractive than it's been in over a year. At recent prices, you can buy the stock for 17.8 times revenue expectations. Interest rates may be on the rise, but that's still a very reasonable price to pay for a business growing its top and bottom lines at a blazing pace.
CRWD Revenue (TTM) data by YCharts.
Crowdstrike's valuation may be high enough to make your eyes water, but it is earning enough to continue growing under its own steam. The company's asset-light operation generated a very healthy $480 million in free cash flow over the past 12 months. This wasn't a fluke either. Management told investors to expect around 30% of total revenue to be reported as free cash flow for the foreseeable future.
3. A growing advantage
CrowdStrike isn't the only company offering endpoint-protection services, but the company's laser focus on endpoint protection has allowed it to quickly gain a leading share of its market. In IDC's latest report, CrowdStrike was the No.1 provider of corporate endpoint security.
Cybersecurity spending is growing rapidly, and CrowdStrike's client roster is growing quickly as well. At the end of April, the number of clients that were subscribing to at least one module from the company's Falcon platform soared 57% year over year to 17,945.
The company's Falcon platform was built from the ground up to safely harbor "containers" that developers increasingly rely on for building, testing, and deploying new applications. After perfecting security for developers' containers, the next step was expanding Falcon to provide endpoint protection for companies trying to let their entire staff work from home with whatever devices they need to get the job done.
Investors can look forward to CrowdStrike maintaining pricing power in a competitive environment because Falcon's advantage over smaller competitors grows right along with its user base. Lessons learned from an attack on one module can be analyzed immediately with Falcon's artificial intelligence engine. This allows patches against new threats to go live for all Falcon modules in the blink of an eye.
Protect yourself
It's hard to see how a competitor is going to overcome the Falcon platform's rapidly growing dominance. It's even harder to imagine the surging market for endpoint protection softening any time soon.
A bright future makes CrowdStrike look like a great growth stock to buy now, but investors should be careful and only add it to a well-diversified portfolio. The stock has tumbled more than 40% from its recent peak, but it's still trading at prices that rely on surging growth for at least a few more years.
