CrowdStrike Holdings (CRWD +4.33%) is really starting to stand out in the crowded cloud security field. While its growing technology edge is one factor, an even bigger one for investors is its ability to generate free cash, which tallied nearly $136 million in its latest quarter. That's significantly higher than its rivals, as it's converting revenue to cash at a much higher rate.
Cashing in on cybersecurity
CrowdStrike's second-quarter numbers were exceptional. The cloud-based cybersecurity company posted $535 million of revenue, a 58% increase from the prior year. Meanwhile, non-GAAP net income soared from $25.9 million to $85.9 million.
The company is really starting to hit its stride as it scales. While subscription gross margin has leveled off at 79% over the last two fiscal years, it's seeing improved operating leverage as sales and marketing, research and development, and general and administrative costs become a smaller percentage of its revenue. As a result, its operating margin doubled from the 2021 to 2022 fiscal years, going from 7% to 14%. Meanwhile, it improved to 17% during the first half of its 2023 fiscal year.
NASDAQ: CRWD
Key Data Points
That enabled CrowdStrike to generate roughly $210 million of cash flow from operations in its fiscal second quarter, up 94% year over year. Even after heavy product innovation and technology investments, it produced nearly $136 million of free cash flow. That was 84% above last year's total and represented 25% of revenue.
CrowdStrike's ability to convert revenue into free cash flow stands out in the cloud security sector. It's doing so at a far greater clip than its rivals:
|
Cybersecurity Stock |
Last Quarter's Revenue |
Last Quarter's Free Cash Flow |
Free Cash Flow Margin |
|---|---|---|---|
|
CrowdStrike |
$535.2 million |
$135.8 million |
25.4% |
|
Zscaler (ZS 0.47%) |
$286.8 million |
$43.7 million |
15.2% |
|
Okta (OKTA +3.59%) |
$415 million |
$11 million |
2.7% |
|
Cloudflare (NET 23.53%) |
$234.5 million |
($4.4 million) |
-1.9% |
Data source: Company earnings releases.
That will serve it well during the current environment, where it's getting harder for companies to access outside capital to fund their expansion as interest rates rise and stock valuations come down. CrowdStrike's growing free cash flow pushed its cash balance to $2.32 billion, up from around $2 billion at the end of January. With only $740 million of debt, CrowdStrike is sitting on a sizable and growing net cash position. Its cash balance and growing free cash flow give it more financial flexibility than its peers to make investments and acquisitions. It also has the flexibility to potentially start returning capital to shareholders via repurchases and dividends.
Becoming a cash printing machine
CrowdStrike expects its free cash flow margin to widen further as it reaches its peak target operating model. The company envisions a subscription gross margin in the range of 77% to 82%+ in the future, leading to an operating margin in the 20% to 22%+ range. That sets it up to deliver a more than 30% free cash flow margin.
That level would allow the company to generate an enormous amount of free cash flow as it continues expanding. CrowdStrike has set an ambitious target to grow its annual recurring revenue from its current pace of $2.18 billion to more than $5 billion in the near term. At a 30% free cash flow margin, it could produce over $1.5 billion of annual free cash flow.
The company has enormous growth potential beyond that level, given the massive and growing market opportunity for cloud-based cybersecurity. CrowdStrike currently sees a $58 billion total addressable market opportunity for its current product portfolio, up from $25 billion at its initial public offering in 2019. It sees that number rising to $71 billion by 2024 within its existing portfolio. Meanwhile, new products, future initiatives, and other growth drivers could see its total addressable market reach $126 billion by 2025. CrowdStrike's ability to continue capturing a growing share of this expanding market sets it up to produce a significant amount of cash in the future.
Generating a striking amount of cash
CrowdStike stands out from its rivals in the cloud security sector for its ability to produce free cash. It's already converting revenue to free cash at a much higher clip. Meanwhile, it sees its free cash flow margin expanding further as it continues to scale. That has it on track to produce an enormous amount of free cash as it continues its rapid expansion, giving it an even greater financial advantage over rivals.
