Just because some stocks had a bad 2022 doesn't mean the companies were doing poorly. Many stocks became disconnected from their actual business performance in 2021 and paid for it in 2022. But now some stocks' valuations have come down to better reflect their companies' prospects, making them intriguing purchases.
Two buys that could make you look like a genius in the future by purchasing them now are CrowdStrike (CRWD +0.01%) and Procore (PCOR +0.21%). These software companies are industry leaders and are capturing a massive market opportunity. I'm excited about these two, and I think you'll also be impressed. Here's more on why each is worth a look today.
1. CrowdStrike is a cybersecurity powerhouse
Cybersecurity is a bit of a black box -- if it's working correctly, you don't notice it. However, that doesn't diminish its importance, as cybercrime is expected to cost the global economy $10.5 trillion by 2025, according to Cybersecurity Ventures. There are multiple pieces to a robust cyber protection plan, but one key is endpoint protection.
Endpoint protection focuses on securing devices with access to a company's network, like laptops, phones, or cloud workloads. By thwarting attackers here, CrowdStrike protects against breaches.
Its software utilizes artificial intelligence (AI) to analyze trillions of data points weekly to differentiate between normal activity and a threat. When abnormal activity is detected, it shuts off that particular device's access.
NASDAQ: CRWD
Key Data Points
While that is the basis of what CrowdStrike does, it has more than 20 modules that expand upon that functionality. Furthermore, business software review company G2 has named CrowdStrike a leader across 16 different categories, so its products' quality is second to none, even when you get outside of CrowdStrike's primary competency.
With its great offerings, it's no surprise CrowdStrike is rapidly growing. In Q3 of fiscal 2023 (ending Oct. 31), its annual recurring revenue (ARR) rose 54% to $2.3 billion. It also converted 30% of revenue into free cash flow (FCF), showing some level of cash profitability, even though it is still losing money on a GAAP net income basis.
Although the stock trades at a pricey 40 times free cash flow, if CrowdStrike can maintain its 30% margin in fiscal 2024 (ending Jan. 31, 2024), it trades at 27 times forward FCF -- about the same as Microsoft's current price-to-FCF ratio.
CrowdStrike is a top company in an increasingly important space. With solid financials and a reasonable forward valuation, CrowdStrike is a smart buy right now.
2. Procore's niche is packed with growth potential
Few industries are as technologically lacking as the construction industry. However, with the industry accounting for about 13% of global GDP in 2017, it's a space ripe with opportunity.
Procore's construction management software is helping to bring this industry into the digital era. By creating a single source of truth, the software provides value to project owners, contractors, and subcontractors. That helps reduce how often rework is required due to poor communication, which cost the construction industry more than $500 billion in 2018.
Procore is much earlier in its company lifecycle than CrowdStrike, as it has barely made a dent in its market opportunity.
| Location | Logo Capture | Volume Capture |
|---|---|---|
| U.S. | 2% | 14% |
| Global | 1% | 2% |
Data source: Procore.
Looking at the chart above, Procore defines logo capture rates as a measure of its "customer count ... as a percentage of the total estimated number of logos in Procore’s addressable markets, where the number of customers is ... the number of entities that have entered into one or more subscriptions with [it]." Clearly, Procore is just scratching the surface with its growth potential.
But even without signing any new customers, Procore projects it can raise its ARR by more than 50% if it transitions existing customers that utilize one to five products to six or more. CrowdStrike and many other software-as-a-service (SaaS) businesses have successfully used this "land and expand" model, so Procore is following in great footsteps.
In Q3, Procore increased its revenue by 41% to $186 million, marking an acceleration in revenue growth. On the profitability side, Procore is a young business and it isn't worried about producing any profits or free cash flow. FCF outflows were $6 million in Q3, but with $265 million of cash on its balance sheet, it has plenty of capital available to survive.
NYSE: PCOR
Key Data Points
The only useful valuation metric available is the price-to-sales ratio because Procore has no profits. At 11 times sales, Procore isn't a cheap stock per se, but it is in line with what other software stocks trade at.
Procore is an early stage software company in an important industry; picking up shares now will make you look like a genius if the business can capture even a fraction of the $9 trillion in construction spending volume that could flow through its platform.
