Many companies are beginning to control spending to deal with future economic headwinds. However, cybersecurity is one area where they cannot afford to cut spending. In 2021, the average cost of a data breach was more than $4 million per incident, a cost that could cripple many businesses.
Cybersecurity improvements are necessary, with cybercrime expected to rise throughout the next decade, regardless of economic conditions. My top pick in this space is CrowdStrike (CRWD -3.90%), and unsurprisingly, it just reported a blowout quarter that included a guidance raise. Yet, the stock is down more than 40% from its all-time high. Does the market know something we don't? Or is this stock a screaming buy?
Image source: Getty Images.
CrowdStrike's platform has become a no-brainer for businesses to adopt
Unlike legacy security providers, CrowdStrike's software was built as a cloud-first solution. Because it is cloud-based, new customers can quickly deploy the lightweight program to endpoint devices (like laptops or phones) across its network. Using artificial intelligence, CrowdStrike analyzes trillions of signals weekly to determine what is a regular activity, an anomaly, or an actual threat. After pinpointing a threat, CrowdStrike can shut that access point down and alert IT of a possible breach.
This solution has taken the security world by storm, and CrowdStrike has grown its customer count from 1,242 in January 2018 to 17,945 by April 2022. Along the way, it captured 15 of the top 20 U.S. banks and 65 of the Fortune 100.
Customers who adopt CrowdStrike's platform also spend more throughout their lifetime, as its net retention rate was 124% for the quarter -- meaning existing customers spent $1.24 for every $1.00 spent last year. This expansion is primarily driven by customers adopting more of CrowdStrike's modules. CrowdStrike's base platform's functionality can be increased by adopting more modules (CrowdStrike currently has 22 different modules), unlocking greater security or data access.
| Percent of Customers Using Multiple Modules | |||
|---|---|---|---|
| Timeframe | Four or More Modules | Five or More | Six or More |
| Q1 FY2022 | 64% | 50% | 27% |
| Q1 FY2023 | 71% | 59% | 35% |
Data source: CrowdStrike. The first quarter of CrowdStrike's fiscal year (FY) ends April 30.
Furthermore, Forrester Research found adopting CrowdStrike's security solution led to a return on investment of 403%, with a payback of under three months when assessed from a three-year time frame.
CrowdStrike's platform is loved by its customers and independently verified to deliver substantial value. However, is the stock worth buying?
CrowdStrike is raising guidance while others are cutting theirs
For its FY2023 first quarter (ending April 30, 2022), CrowdStrike reported that its annual recurring revenue rose 61% to $1.9 billion. Additionally, it cranked out a free cash flow of $157.5 million, representing a 32% margin.
These excellent results were overshadowed by CrowdStrike's guidance increase when many companies are cutting their outlook. For FY 2023, CrowdStrike raised its revenue projections by 2.3% and non-GAAP income per share by 17%. This raise demonstrates how CrowdStrike is becoming more robust as others are weakening -- a massive competitive advantage.
However, CrowdStrike's stock is still expensive. Even though its valuation is off significantly from its highs, a price-to-sales ratio of nearly 25 is by no means cheap.
CRWD Price to Free Cash Flow data by YCharts
While valuation is a risk investors need to understand, they must also factor in CrowdStrike's vast market opportunity. With future product launches, CrowdStrike expects to operate in a $126 billion market opportunity by 2025. Because it has an industry-leading product in a huge market, CrowdStrike's stock will always have a premium valuation, unless it falls from its leadership position.
CrowdStrike's massive market, fantastic customer retention, and free cash flow make the business an excellent investment. Although, the valuation is a little cause for concern. But if you're holding the stock with a multi-year time frame in mind, valuation becomes less of an issue.
I think CrowdStrike is a steal at these prices, but it could be affected by a further market sell-off. With CrowdStrike's business unaffected by the current economic environment, investors should pick up the stock today with the mindset of holding for at least three to five years.
