Even though cybersecurity company CrowdStrike Holdings (CRWD -0.83%) has been notching tremendous revenue growth, it is currently unprofitable and that's been a strike against it with investors, especially as interest rates rise. Many analysts don't expect CrowdStrike to turn profitable until 2025 and you might be wondering if the stock is a buy now.
Here are three reasons CrowdStrike is still a great buy.
1. The security industry is recession-resistant
Internet security incidents have been increasing and, according to the 2021 Travelers Risk Index from The Travelers Indemnity Company, cyber-risks such as security breaches and unauthorized access to financial accounts are businesses' top concern. As a result, cybersecurity has become an essential technology to run a business.
CrowdStrike CEO George Kurtz said on the company's quarterly conference call with analysts in early June that the demand for cybersecurity is "more robust today than this time last year as cybersecurity is not discretionary."
Even if the country falls into recession, businesses will likely prioritize their cybersecurity budget, keeping demand for CrowdStrike's products high.
2. Kudos and strong numbers
CrowdStrike has been recognized as one of the best-run companies. In 2021, it was No. 4 on Inc.'s first annual Best-Led Companies list. CrowdStrike said the review looked at "performance and value creation; market penetration and customer engagement; talent; and leadership team."
An IDC report released in January recognized CrowdStrike as No. 1 for endpoint security market share with 14.2%, with Microsoft the only company keeping up with CrowdStrike's growth.
Additionally, CrowdStrike's innovation and strategy have translated into stellar fundamentals.
Annual recurring revenue (ARR) is a vital measure of the health of CrowdStrike's subscription business and also gives management the ability to forecast future revenue. The chart below shows how the metric has been growing.
The company posted first-quarter fiscal 2023 year-over-year growth in ARR of 61% on a $1.2 billion base number. The quarter ended April 30, 2022. The rising ARR figure indicates great future revenue growth potential, and is one possible reason management raised revenue guidance for the full year.
In addition, it recorded a free cash flow (FCF) margin of 32%, which translated into robust cash generation -- another sign of financial health.
CrowdStrike management's ability to maintain strong revenue growth and increase FCF signifies a well-run company and powerful business model.
3. CrowdStrike has a strong network effect
CrowdStrike uses a cloud platform named Falcon to protect its customers against malware and breaches. Falcon accomplishes its job by using a tiny sensor that detects local threats on a device and neutralizes them. Additionally, the lightweight sensor sends information from each device to an artificial intelligence (AI) algorithm named Threat Graph, which does the heavy analytical work behind predicting and preventing real-time threats.
Each installation of one of these sensors on a device creates more information for Threat Graph. And with more information, the AI becomes more intelligent. As a result, the Falcon platform becomes better at identifying threats. It's a network effect that increases the value of Falcon with each new user. You can see the Falcon platform's stickiness through its customer retention and expansion metrics seen in the chart below.
A high gross retention number means a company retains most of its customers. CrowdStrike's gross retention number of 98.1% (the bottom line) handily outpaces the estimated median among cloud companies of around 90%. Additionally, a high net retention number indicates an ability to retain and upsell customers. CrowdStrike's ability to maintain net retention above 120% is also a sign of an excellent company.
There's risk, but also potential
CrowdStrike stock currently sells at a price-to-sales ratio of 24.68, which is a high valuation compared to security peers such as Palo Alto Networks, which has a P/S under 10. In the short term, CrowdStrike's valuation could continue to drop as interest rates rise and investors get more pessimistic about the stock, so risk-averse investors might want to avoid CrowdStrike for now.
But Crowdstrike bulls might argue that the company's sturdy fundamentals support its valuation, and once the Federal Reserve ceases its interest rate hikes, the stock should quickly rebound.
If you are a long-term investor willing to accept short-term risk, you should consider putting CrowdStrike on your buy list today.