Cloud-based cybersecurity company CrowdStrike Holdings (CRWD +1.20%) has shown how lucrative its business model can be. The company is rapidly growing, but that hasn't prevented it from turning a nice cash profit along the way. With $1.7 billion in net cash on its balance sheet, investors should look to see how management deploys its capital.
Its options include dividends or share repurchases, acquisitions, and standing pat. How a company spends its cash can give you a lot of insight into how management runs the business. I'll outline the likelihood of each option below, along with the potential pros and cons.
NASDAQ: CRWD
Key Data Points
Consider CrowdStrike's overall financial picture
CrowdStrike has been generating positive free cash flow almost since it went public a few years back. Revenue has more than quadrupled since then, and free cash flow has grown steadily. Even though revenue growth has slowed as the numbers have gotten bigger, 52% year-over-year growth still lands the stock squarely in the growth category.
Revenue growth might continue slowing, but free cash flow should grow. That means that CrowdStrike's pockets will only grow fatter, underlining the need for investors to know how management will handle its resources. At some point, sitting on so much cash becomes counterproductive.
CRWD Revenue (TTM) data by YCharts
The company's net cash position of $1.74 billion includes a total of $2.46 billion on hand, minus $740 million in debt the company took out to boost its cash position when interest rates were low (debt carries a 3% rate). There's more cash on the books than CrowdStrike's entire revenue over the past four quarters, so what will come of it?
Option 1: Giving cash to shareholders
A company will find ways to distribute profits to shareholders when there's no other useful purpose for it. This can be through dividends, direct cash payments to shareholders, or share repurchases, where a company buys its stock to reduce the number of outstanding shares, making the remaining shares more valuable.
To date, CrowdSrike has done neither, and investors probably shouldn't expect these actions anytime soon. Dividends and repurchases are typically for more mature companies that are done with their growth days. CrowdStrike is still rapidly growing and hasn't yet generated positive earnings per share (EPS).
If you see dividends or repurchases announced, it could be a red flag for management's confidence in the company's growth prospects. Therefore, investors should look for management to instead spend on ways to continue driving revenue growth.
Option 2: Standing pat
CrowdStrike could spend its cash internally to fuel growth. You can see below that CrowdStrike's impressive revenue growth hasn't come without similarly aggressive spending on research and development and marketing. The cybersecurity industry is quite competitive; there are several competitors, both industry incumbents and new companies, bringing new technology to market (CrowdStrike is one of them).
These companies don't all perform the same functions -- for example, CrowdStrike partners with zero-trust cybersecurity company Zscaler. However, product expansion can lead to competitive overlap.
CRWD Sales and Marketing Expense (TTM) data by YCharts
Having a hefty cash pile to continue investing in growth without the worry of raising new funds or an economic downturn could pay long-term dividends for the company if it can grow when others struggle. If the company keeps stacking cash, keep an eye on expenses like those above; ideally, you'll see revenue grow faster than expenses.
Option 3: Acquisitions to come?
CrowdStrike could also grow externally, acquiring assets instead of spending the time and money to develop them internally. Management has acted in this direction already, acquiring multiple companies, including:
- Humio for $400 million in 2021.
- Preempt Security for $96 million in 2020.
- Payload Security for $8 million in 2017.
- SecureCircle for undisclosed terms in 2021.
- Reposify for undisclosed terms in 2022.
Acquisitions can bolster the company's product offerings, which it sells to the market as product modules. Growth can come from expanding the company's market opportunity, as seen below, or cross-selling multiple modules to its customer base. Approximately 60% of CrowdStrike's customers use at least five product modules.
Image source: CrowdStrike Holdings investor presentation.
CrowdStrike has done a great job of growing profitably from a cash flow standpoint, so investors should look for more of the same moving forward. Management has invested heavily internally and externally, and a growing cash pile gives management more ammunition to remain aggressive in a highly competitive and innovation-reliant industry.
The future appears bright for investors; meanwhile, the stock currently trades at a price-to-sales ratio (P/S) of 13, just above its lowest point as a public company. Now could be one of those times when an irrational market offers you a compelling deal on a quality long-term holding.
