Business operations for restaurant-technology company Olo (OLO -2.27%) and cloud-based cybersecurity provider CrowdStrike (CRWD -1.82%) couldn't be more different. And yet, the investment theses for these two companies are surprisingly similar, as we'll see here.
Optionality is the powerful trait that could make CrowdStrike a market-beating stock over the long term. And it's the same trait that Olo hopes works for it as well.
Optionality at work for CrowdStrike
All organizations want to prevent cybersecurity attacks, but many don't know where they're vulnerable. That's where Reposify comes in. Its software figures out where attackers can gain entry so that holes can be plugged. It's a valuable service, and it's why CrowdStrike acquired Reposify in September.
For CrowdStrike, its acquisition of Reposify gives it 23 different software modules related to cybersecurity. This is a crucial point to understand: CrowdStrike isn't just one product but rather 23 different cybersecurity products.
Optionality refers to a company's ability to sell additional products or services. And CrowdStrike's optionality from its 23 modules is part of what makes this investment thesis so compelling.
Consider that as of the third quarter of its fiscal 2023, CrowdStrike had 21,146 customers, up a whopping 44% year over year. However, only 21% of these customers used seven or more of its cybersecurity modules. That leaves lots of room for revenue upside if customers adopt more services over time.
This appears to be what's happening. CrowdStrike ended its fiscal 2022 on Jan. 31, 2022 with 16,325 subscription customers. According to management, only 57%, or about 9,300, had adopted five or more modules at the time.
Fast forward to Q3 and 60% of CrowdStrike's customers have five or more modules. This is almost 12,700 customers. In other words, in the first three quarters of fiscal 2023, CrowdStrike grew customers 29.5%. But customers with five or more modules were up about 36% over this time -- faster than customer growth overall.
If this trend continues, then it's easy to imagine how CrowdStrike could grow revenue at breakneck speed for a long time.
This is true for Olo, too
Olo got its start by offering online ordering technology for restaurants. But it has 12 software modules to assist restaurants in marketing, front-of-house hosting tech, checkout services, and more. And as of the end of 2021, the average Olo customer only used 2.7 of the 12 modules.
When Olo reports financial results (likely in February), I hope it will update this outdated number. But financial results in the first three quarters of 2022 were promising.
Like most software-as-a-service (SaaS) stocks, Olo measures customer spend with a metric called the dollar-based net-revenue retention (DBNR) rate. A DBNR over 100% indicates that last year's customers spent more money this year. And for Olo, one of the factors that can push its DBNR over 100% is the adoption of more software modules by its customers.
Olo's DBNR was 107%, 106%, 107% in Q1, Q2, and Q3, respectively. Therefore, it appears that this part of the investment thesis is playing out for Olo. And with 12 modules total, the company could potentially grow its top line for a long time as this trend keeps playing out.
With a market capitalization of just $1.3 billion as of this writing, Olo is a small-cap stock. And small-cap stocks can really be compelling investments when they have large growth opportunities in front of them, like Olo does.
Two good buys
Trading at 12 times sales and seven times sales, respectively, neither CrowdStrike stock nor Olo stock is necessarily cheap. But they are about the cheapest they've ever been, as the chart below shows.
OLO PS Ratio data by YCharts
For me, buying stocks at higher valuations requires a reasonable confidence that top-line growth can be sustained for a very long time. And that's what I see with both CrowdStrike and Olo. Both can grow revenue very fast thanks to their aforementioned optionality.
What's more, that optionality is only one aspect of the upside possibilities for CrowdStrike and Olo. Both are still adding completely new customers over time, which helps grow revenue. Moreover, both cybersecurity and digitization in restaurants are growing opportunities.
Therefore, both CrowdStrike and Olo are stocks I'd consider adding to a diversified portfolio of stocks today.
