The current rising-interest-rate, elevated-inflation-rate market environment has many investors wary of growth stocks. but even in these uncertain times, it's good practice to not put all your eggs in one basket by buying just value stocks. Even discounted growth stocks (if you find the right ones) can supercharge portfolio returns when they hit.
Nvidia, Netflix, and ServiceNow are all tech growth stocks that have created immense wealth for investors over the past 10 years, with returns of 7,450%, 1,120%, and 1,220%, respectively. What do these stocks have in common (besides all currently trading at a discount to recent all-time highs)? They are all well-run companies and they all serve secular growth industries.
Another secular growth industry catching investors' attention at the moment is cybersecurity. Statista estimates that revenue in the global cybersecurity market will hit $174 billion in 2023 and grow to $262 billion by 2027. That growth potential bodes well for CrowdStrike (CRWD 0.14%), which is a premier defender against security breaches (it was named a magic quadrant leader by Gartner). It has also bested Microsoft in growth and market share for endpoint security for three consecutive years.
CrowdStrike has several desirable growth-stock traits. Let's look at three of them.
1. CrowdStrike has impressive growth from existing customers
CrowdStrike's cloud-based Falcon platform is modular, so customers can tailor the platform to their needs by choosing which modules to use. Often, customers will upgrade subscriptions to include more modules over time. This is one way that CrowdStrike can grow revenue from existing customers. Currently, 60% of customers use at least five modules, but only 21% use at least seven. That leaves lots of fertile ground for existing customer revenue growth.
Dollar-based net retention rate measures sales growth among existing customers. Anything over 100% is positive, and CrowdStrike has been above 120% since the beginning of fiscal 2019, an indicator of exemplary execution and how much customers value the products offered.
2. CrowdStrike is attracting swarms of new customers
CrowdStrike's customer count has increased by a multiple of 17 since fiscal 2018 and nearly quadrupled since fiscal 2020, as shown below:
Data source: CrowdStrike. Chart by author.
The number of new customers grew by 44% year over year in the last quarter alone, and this increase shows little sign of abating, especially given the growing threat that bad actors pose to companies and CrowdStrike's ability to fight it.
3. CrowdStrike has booming sales
This combination of internal and external growth is a recipe for expanding sales. CrowdStrike's gains in annual recurring revenue (ARR) have been phenomenal, as shown below.
Image and Data source: CrowdStrike.
With a recession possible, many companies are cutting back on spending, which could hurt CrowdStrike's short-term sales. However, the cybersecurity industry could be more resilient than most others since companies would be unwise to scrimp in this area. It is much more expensive to clean up after a breach than to protect against one happening in the first place.
CrowdStrike is also rapidly increasing free cash flow and has a gross margin above 75%, indicating that the company could have a profitable future once it scales up.
Investing in growth
CrowdStrike is not yet profitable on the basis of generally accepted accounting principles (GAAP) and therefore inappropriate for risk-averse investors.
More than half of the Fortune 500 companies trust CrowdStrike with their security needs. Its terrific technology, multiple avenues for growth, and strong execution make CrowdStrike a choice pick for a long-term growth portfolio.
