BlackBerry (BB -3.14%) and CrowdStrike (CRWD 0.13%) represent two very different ways to invest in the cybersecurity market. BlackBerry reinvented itself as an enterprise-oriented cybersecurity company after retreating from the smartphone market. That transformation accelerated significantly through its acquisition of Cylance in 2019.
CrowdStrike has been disrupting traditional cybersecurity companies with its cloud-native Falcon platform. Instead of installing on-site appliances, which can be expensive and difficult to scale as an organization expands, CrowdStrike only provides cloud-based services. BlackBerry's Cylance runs on a hybrid mix of on-site appliances and cloud-based services, so it isn't considered a direct competitor to CrowdStrike.
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Both stocks clearly appeal to different kinds of investors. BlackBerry's recent growth rates have been tepid, but value-seeking investors believe it might stage a long-term comeback. CrowdStrike's growth rates are impressive, but only aggressive growth-oriented investors will likely accept its high valuations as interest rates continue to rise. So which cybersecurity company will fare better in this challenging market for tech stocks?
Why did BlackBerry's growth stall out?
BlackBerry's revenue rose 15% in fiscal 2020, which ended in February of the calendar year, after it closed its acquisition of Cylance. But in fiscal 2021, its revenue fell 14% after it lapped that purchase and struggled with the pandemic's impact on the auto industry. QNX, its embedded OS for connected vehicles, had previously been a major growth engine for its Internet of Things (IoT) business.
In fiscal 2022, BlackBerry's revenue plunged 20% to $718 million. Its cybersecurity revenue, which mainly comes from its Spark platform (and includes Cylance), fell 3% to $477 million.
Its "licensing and other" revenue plunged 77% to $63 million as third-party OEMs stopped licensing its brand for new Android devices. It also agreed to sell most of its legacy patents to raise more cash near the end of the fiscal year. Those declines completely offset the recovery of its IoT business, which grew its revenue 37% to $178 million as the auto sector staged a partial post-pandemic recovery.
Yet BlackBerry will likely continue to struggle. For fiscal 2023, analysts expect its revenue to decline 4% to $690 million as inflationary, supply chain, and other macro headwinds continue to disrupt the auto sector. It also still faces tough competition in the crowded cybersecurity market.
BlackBerry's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) turned negative in fiscal 2022, and analysts expect it to remain in the red through fiscal 2024. These dim expectations indicate BlackBerry still isn't a bargain at five times this year's sales.
Why is CrowdStrike still growing?
CrowdStrike's revenue surged 93% in fiscal 2020, which ended in January of the calendar year, and grew another 82% in fiscal 2021. CrowdStrike didn't face as many headwinds throughout the pandemic because it wasn't tethered to big macro-sensitive markets like BlackBerry. Companies could also easily remotely sign up for its cloud-based services without scheduling risky on-site visits and appliance installations.
In fiscal 2022, CrowdStrike's revenue rose 66% to $1.45 billion as its adjusted net income soared 157% to $161 million. For fiscal 2023, it expects its revenue to grow 53% to 54% and for its adjusted earnings per share (EPS) to nearly double. Analysts expect its adjusted EBITDA to more than double this year and remain positive for the foreseeable future.
CrowdStrike is growing like a weed for three simple reasons. First, it has established an early mover's advantage in cloud-native cybersecurity services. That's why its number of subscription customers jumped from 2,516 at the end of fiscal 2019 to 19,686 in the second quarter of fiscal 2023. Its gross margins have also consistently stayed in the high 70s, which suggests it has plenty of pricing power in that growing market. By comparison, BlackBerry's sluggish cybersecurity segment's gross margins are still hovering in the high 50s.
Second, CrowdStrike's customers are locking themselves in by using more of its cloud-based modules. In its latest quarter, 36% of its customers were using at least six of its modules -- compared to just 29% a year earlier. Lastly, its dollar-based net retention rate has remained comfortably above its "benchmark" level of 120% since its IPO in 2019.
CrowdStrike is growing a lot faster than BlackBerry, but it's also priced accordingly at 20 times this year's sales. That high price-to-sales ratio could limit its near-term gains as higher interest rates drive investors toward more conservative investments.
The obvious winner: CrowdStrike
BlackBerry briefly became a meme stock after it experienced a short squeeze last year, but its underlying business is still breaking down. Its transformation from a hardware maker into a software maker might have bought it some more time, but it isn't standing out in that market. CrowdStrike is clearly the better long-term play for investors who are willing to ride out the near-term volatility. Even if its growth cools off over the next few years, this high-growth cybersecurity stock could still generate some impressive multibagger gains.
