Is cloud-based cybersecurity company CrowdStrike (CRWD 0.13%) stock a buy right now? Some on Wall Street would say no. For example, Deutsche Bank analyst Brad Zelnick recently downgraded it, basically saying both cybersecurity stocks and software stocks are in for a challenging 2023, according to The Fly.
However, investing in a top-notch company like CrowdStrike during a challenging time may just be the ticket to long-term market-beating returns.
The under-the-radar trend in CrowdStrike's favor
PwC's 26th Annual Global CEO Survey recently found that almost half of the more than 4,400 CEOs surveyed plan to invest more in cybersecurity and data privacy in the coming year. And according to The Business Research Company, cybersecurity is already a $200 billion industry and poised to grow another 11% in the coming year.
Therefore, cybersecurity is already big. And it's getting bigger because CEOs plan to invest more.
However, the ongoing boom in cybersecurity spending might not be evenly distributed in the near future. In September, consulting firm Gartner found that 75% of companies wanted to consolidate their security vendors -- in other words, rather than buying products from many different providers, they want to buy products from fewer providers.
This is a massive shift. According to the same research from Gartner, only 29% of organizations cared about consolidation back in 2020.
This dynamic might explain real, recent results in the cybersecurity space. Consider that privately held Cybereason is a similar business to publicly traded CrowdStrike and SentinelOne. Cybereason reportedly hit a private-market valuation of $3.3 billion in 2021 and was getting ready for an initial public offering (IPO). The company's co-founder claimed Cybereason was tripling its business at the time -- seemingly outpacing gains from CrowdStrike.
However, in October, Cybereason management told employees it wasn't pursuing an IPO any longer. Also at that time, it laid off 17% of its workers. And while it said that growth was still strong, the layoffs highly suggest that growth is slowing.
Meanwhile, growth from Cybereason's larger rivals CrowdStrike and SentinelOne may also be slowing. But both companies are still putting up stellar growth rates, and it indicates that maybe these two players are benefiting from the under-the-radar consolidation trend in cybersecurity.
CRWD Revenue (Quarterly YoY Growth) data by YCharts
What I like about CrowdStrike
As of Oct. 31, 2022, CrowdStrike had annual recurring revenue (ARR) of $2.34 billion, which was up 54% year over year. However, ARR from customers spending over $1 million was up a more robust 67%.
CrowdStrike's co-founder and CEO, George Kurtz, had this to say about its million-dollar customers of its Falcon software platform in the company's fiscal third-quarter conference call: "These larger customers are standardizing on Falcon, consolidating vendors and prioritizing expansion projects that represent sizable cross-sell and upsell opportunity that are moving forward even under uncertain macro conditions." In other words, CrowdStrike's management is noticing the consolidation trend.
Here's why this could get even better: Falcon has 23 products -- modules -- for customers to choose from. As of Q3, 60% of its subscription customers had at least five modules. But only 21% had seven modules.
In short, there's plenty of room for CrowdStrike to expand within its current customer base in 2023 and beyond because of all the cybersecurity modules it offers.
And this says nothing about ongoing customer acquisition, which is also stellar. CrowdStrike ended Q3 with 21,146 subscription customers, up 1,460 in a single quarter.
Why I like CrowdStrike right now
CrowdStrike stock is down over 40% in just the past six months. Many fear slowing growth in 2023, like what Deutsche Bank's Zelnick mentioned in his downgrade. And this was fed by CrowdStrike's Q3 results. Both the third quarter and the fourth quarter are typically good times to see growth in the company's ARR, due to the timing of enterprise budgets. But 2022 didn't get the boost it normally does during those quarters, making investors uncomfortable with prospects in 2023.
However, it may just all be an issue of timing. For example, CrowdStrike management noted that some of its customers signed contracts that have elements scheduled to start later in the contract. This means that it doesn't show up in ARR yet but likely will.
Moreover, CrowdStrike's remaining performance obligations (revenue under contract) is at $2.8 billion and 35% is expected to come in more than one year from now. That's the highest dollar amount ever.
In conclusion, the cybersecurity space is growing and appears to be consolidating -- and both trends benefit CrowdStrike. Moreover, while the market frets about 2023, the future still looks quite bright when looking at many metrics.
It could always get cheaper. But trading at close to its lowest valuation ever, this may be one of the best times to buy CrowdStrike stock since it went public in 2019.
