In his 2012 book Antifragile, author Nassim Taleb wrote: "Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty." I believe this might aptly describe cybersecurity specialist CrowdStrike Holdings (CRWD 3.63%).
I quote Taleb here because of how much volatility exists in the economy right now. But this might be a good opportunity for CrowdStrike to put its $2 billion in net cash to good use, as I'll explain in this article.
Why does CrowdStrike have so much money?
According to its most recent quarterly filing, CrowdStrike has a little more than $2.7 billion in cash, cash equivalents, and short-term investments. It also has $741 million in long-term debt. Subtracting its debt from its cash gives you the company's net-cash position of about $2 billion.
When CrowdStrike went public in 2019, its initial market capitalization was about $6.7 billion. For perspective, it had just completed its fiscal 2019, in which it generated $250 million in revenue. That was an incredibly high valuation of nearly 27 times sales. Granted, the company's revenue was up 111% in fiscal 2019. But it was a rich valuation nonetheless.
Valuations for stocks were generally high in 2019 -- pushed up because interest rates, while rising, were still near historic lows. Many companies cashed in via initial public offerings (IPOs), CrowdStrike included. This allowed CrowdStrike to bring in around $600 million.
Since its IPO, astute investors know that CrowdStrike has lost money according to generally accepted accounting principles (GAAP). For example, the company had a net loss of $182 million in its fiscal 2023, which ended in January.
However, much of CrowdStrike's net loss is due to stock-based compensation -- a non-cash expense. For this reason, the company has generated positive cash from operations, including $941 million in fiscal 2023. This dynamic has helped push its net cash to where it sits today at $2 billion.
CRWD Cash and Short-Term Investments (Quarterly) data by YCharts
Stock-based compensation is a legitimate concern for investors -- one we can't explore here. The point is, CrowdStrike has taken advantage of favorable stock market conditions to fill a treasure chest.
Now market conditions have changed. And CrowdStrike is preparing to put its money to use.
What's the billion-dollar plan?
At the Morgan Stanley Technology Media and Telecom Conference, an analyst asked CrowdStrike's management how it planned to use its net-cash position. CFO Burt Podbere alluded to how rising interest rates are affecting private-market valuations and the venture-capital space. With this context, he then said: "As private companies look and see what their opportunities are, potentially joining CrowdStrike could be a really good one. And we want to be there to be able to take advantage of that."
In other words, CrowdStrike acquired its treasure chest when valuations were high. Now it plans to deploy its cash to acquire other companies while valuations are low. That could be a winning strategy.
To be clear, small, cash-burning cybersecurity outfits may indeed look to well-capitalized players like CrowdStrike right now. Consider that SVB Financial collapsed earlier this month, in part, due to large cash outflows at its bank. And there were outflows because its customer base was disproportionately comprised of cash-burning start-up companies. Many of these companies need funds from venture capitalists to operate. But funding decreased as interest rates rose.
This is why Podbere believes private companies may choose to sell to CrowdStrike now.
That said, the growth-by-acquisition strategy is inherently fraught with risk. Public companies frequently overpay, fail to realize promised synergies, and eventually wind up writing off goodwill -- a big hit to shareholder value. It's a scenario CrowdStrike's shareholders hope will be avoided.
However, there's indeed reason for optimism here. Consider that in 2020, CrowdStrike acquired a company called Preempt Security for $96 million -- seemingly an outrageous price because Preempt only had about $7 million in annual recurring revenue (ARR) at the time. However, Preempt now has over $100 million in ARR, demonstrating management's skill in making acquisitions. CrowdStrike's 2022 acquisition of Reposify seems like it's off to a strong start as well.
CrowdStrike stock still has a rich valuation today and consequently needs to sustain high revenue growth for a long time to justify its current price. Some growth will likely be organic -- it has a big opportunity from its partnership with Dell Technologies, for example. But it will need to prudently allocate capital during this volatile time to grow inorganically as well.
Of course, past achievements don't guarantee future success in this regard. But CrowdStrike's history of acquisitions does offer optimism that it can "thrive and grow" during this period of volatility, like Taleb wrote about.
