Whether its anti-money laundering protocols, multi-factor authentication on work devices, or password requests from general applications like Instagram and Twitter, cybersecurity is all around us. The effects of the COVID-19 pandemic, such as remote work, served as a catalyst for the cybersecurity industry in particular.
Big tech companies like Microsoft and Alphabet doubled down on cyber efforts, and smaller, albeit formidable players such as CrowdStrike (CRWD 0.13%) and Zscaler quickly entered the spotlight. However, as pandemic concerns subside, new concerns such as inflation and recession are beginning to dominate the headlines.
Corporate executives have been parroting a similar narrative over the last few months -- namely, budgets are tight, sales cycles are getting longer, and sales growth will almost certainly slow down. Even with these short-term cyclical headwinds, CrowdStrike's earnings illustrate how the cybersecurity industry has long-term secular tailwinds. The company's jaw-dropping results for its fourth quarter and fiscal year 2023 should encourage investors, to say the least.
The numbers don't lie
Although financial statements highlight total revenue, gross margin, and net income, software businesses also use certain key metrics, including annual recurring revenue (ARR) and net revenue retention (NRR).
Oftentimes, software companies split revenue into two buckets: recurring revenue and professional services. Recurring revenue growth is usually the focal point of Wall Street analysts, as it tends to carry higher margins than non-recurring professional services. Net revenue retention measures ARR net of churn -- assuming it is above 100%, the company is outselling its churn.
For its fiscal year ended Jan. 31, 2023, CrowdStrike reported ending ARR of $2.6 billion, which represented 48% growth year over year. Additionally, the company's NRR was 125% compared to 122% during the same period in the prior year. This growth in dollar-based retention implies that CrowdStrike is expanding within existing customer cohorts, thereby driving customer lifetime value and stickiness even higher.
Given the growth in ARR and strong customer retention, it shouldn't be a surprise that CrowdStrike reported records in both operating cash flow and free cash flow. According to the earnings report, operating cash flow was $273 million, compared to $160 million during the fourth quarter of fiscal 2022. Furthermore, free cash flow for the fourth quarter was $210 million, compared to $127 million in the fourth quarter of fiscal 2022. For the entire fiscal 2023, the company generated operating cash flow of $941 million, which represented 64% annual growth over fiscal 2022. The company's fiscal 2023 free cash flow was $677 million, which was 53% growth over fiscal 2022.
Image source: Getty Images.
What is Wall Street saying?
The table below illustrates the changes in price targets and investment recommendations from several Wall Street banks.
| Bank Name | Prior Price Target | New Price Target | Rating |
|---|---|---|---|
| J.P. Morgan | $137 | $155 | Overweight |
| BTIG | $148 | $163 | Buy |
| RBC Capital | $150 | $160 | Outperform |
| UBS | $150 | $165 | Buy |
| Evercore ISI Group | $200 | $190 | Outperform |
| Citigroup | $145 | $155 | Buy |
Data source: https://www.benzinga.com/quote/CRWD/analyst-ratings
There is a lot to unpack from this table. First and foremost, at the time of this writing, CrowdStrike stock trades at roughly $120 per share. What's interesting is that all of the banks above had higher price targets in prior research reports compared to CrowdStrike's current intrinsic value.
After its Q4 earnings call, all of these banks except one raised price targets even further. While Evercore lowered its price target, it still assigned a buy equivalent rating to the stock, and its models suggest nearly 58% upside to the current share price.
J.P. Morgan, UBS, and Citigroup all have buy or buy equivalent ratings on CrowdStrike, and each bank assumes nearly 30% upside on the stock.
Keep an eye on valuation
As stated many times, valuation can be more of an art than a science. While CrowdStrike is free-cash-flow positive, it is still net income negative on a GAAP basis. For this reason, metrics such as price-to-earnings or the PEG ratio can be misleading.
Per the earnings report, CrowdStrike is guiding for total revenue of nearly $3 billion in fiscal 2024, which would represent 36% annual growth. Although this would signal a slowdown in annual revenue growth, investors have been witnessing similar outlooks for tech companies of all sizes.
Even so, revenue growth of over 30% should not be discounted, especially during times of heightened economic uncertainty. While the capital markets may continue to fluctuate dramatically throughout 2023, long-term investors should be eager to take advantage of the recent dip in CrowdStrike stock.
The company trades at nearly 14 times its trailing-12-month sales (P/S), which is a premium compared to competitors Zscaler (12 times P/S) and Okta (7 times P/S). These valuations may imply that the capital markets favor CrowdStrike over its competition.
For current holders, now may be an opportunity to lower your cost-basis. For investors who are looking for companies with momentum in growing end-markets, CrowdStrike certainly represents a compelling growth story.
