Like many other cloud-based companies, the stock of CrowdStrike Holdings (CRWD -3.91%) has taken a significant dive since the fourth quarter of 2021, as investors became more concerned about inflation's effect on high-growth stocks. However, this company has maintained excellent fundamentals during this economic storm and will likely outperform the market as the global economy rebounds.
Here are three reasons why CrowdStrike is one of the best growth companies to invest in during this market downturn.
1. Customers love the CrowdStrike Falcon platform
CrowdStrike recently reported that it added over 1,700 net new customers at the end of its fiscal 2023 second quarter (ended July 31) to reach a total of 19,686, up 51% year over year.
Image source: CrowdStrike investor presentation.
There are two reasons why organizations are gravitating to its cloud-based Falcon platform.
First, Falcon has become very popular for its ability to protect against data breaches and other attacks. Research and advisory companies like Gartner and Forrester Research consistently rank Falcon as the best security solution in many categories. Consequently, the company sees high demand for its product and entered its fiscal 2023 third quarter with a "record pipeline" of new customers wanting to join the platform.
Second, a key selling point for many companies is to have one platform that can consolidate multiple security and information technology (IT) functions. Among the benefits of using only one platform are better efficiency and the consumption of fewer resources. In contrast, older security and IT vendors tend to sell offerings that provide just one narrow solution. For years, companies have purchased multiple single-point solutions from different companies and patched them all together, resulting in complexity and inefficiencies. However, Falcon is now grabbing market share from these vendors by replacing that patchwork of solutions with one all-encompassing platform.
By consolidating on Falcon, customers can simplify their security and IT operations and get an immediate return on investment -- crucial in a period when companies are scrutinizing every expense.
2. The company has an outstanding balance sheet and cash flows
At the end of July, the company had $2.32 billion in cash and equivalents on its books against $740.3 million in long-term debt. Additionally, it has a quick ratio of 1.7. A quick ratio above one indicates a company is capable of paying all its short-term liabilities within a year, or in other words, a balance sheet built to withstand short-term economic disruptions.
The chart below shows the company had more than 50% free cash flow (FCF) growth both in its latest full fiscal year and current fiscal year to date.
Image source: CrowdStrike investor presentation..
Strong FCF is critical during a downturn for two reasons. First, many consider FCF the ultimate measure of a company's financial performance. During major downturns, investors will often quickly sell companies without FCF and buy companies with positive and growing FCF.
Second, FCF represents the cash available for the company to repay creditors, pay out dividends, or expand the business. Since CrowdStrike does not currently pay dividends and has enough cash to pay off all its debts and then some, it has plenty of financial flexibility.
3. The company continues to execute on its investment plan
Despite internet security remaining a high-growth area during this downturn, many start-up cybersecurity companies are in trouble and have laid off significant chunks of their workforce. For instance, cybersecurity company IronNet slashed 17% of its workers in June. That is only one example out of many high-flying cybersecurity companies pulling back the reins on their growth plans.
In contrast, CrowdStrike has yet to lay anyone off and has already said during its latest earnings call that it will continue hiring in 2022 as its growth plans remain intact. Ongoing investment in research and development, sales and marketing, and expansion into new markets will help the company grab share from struggling competitors that can't keep up during a downturn.
The company is not immune to a recession
Although CrowdStrike might be resistant to a poor economy, it is not immune to a recession, and there is a reason for risk-averse investors to avoid this stock.
CrowdStrike sells at a price-to-sales (P/S) ratio of 23.9, which is very high compared to the broader computer processing and cloud services industry's P/S ratio of 4.4. As a result, should economic conditions truly become dire and growth for Crowdstrike slows, the market reaction will likely be swift and severe.
However, if you can look past the potential volatility with a long-term focus on a company that can outperform the market coming out of this downturn, CrowdStrike is an excellent bet.
