Many investors like to have some segment of their portfolio devoted to growth stocks, and CrowdStrike (CRWD +1.72%) and Snowflake (SNOW +1.07%) are two names that often come up as top growth stocks. But which one should investors buy? Let's dive in and see which one takes the cake.
The business model is similar
The companies have a similar business structure but offer different products. CrowdStrike focuses on cybersecurity, while Snowflake gives its clients tools to turn raw data into useful information. Each delivers its product in a software package, although how they charge for it is different.
CrowdStrike has customers pay for its software through a subscription, often charged annually. This is an advantage during tough times, as customers would be forced to completely cut their cyber protection if they didn't pay their bills. With how vital cybersecurity is, this isn't likely to happen, making CrowdStrike's revenue flow extremely reliable.
NASDAQ: CRWD
Key Data Points
Snowflake charges its clients through usage, so they can store their data on Snowflake's platform and then only run a query once a month to save money. However, clients can obtain pricing discounts through committed usage, which benefits both parties. Still, this doesn't insulate Snowflake from customers from reducing their usage during tough times, which makes its product revenue slightly less steady than CrowdStrike's.
Both companies' business model hinges on customers signing up for the platform, then expanding their usage. For CrowdStrike, this comes in the form of clients adding additional security coverage, known as modules. CrowdStrike has succeeded in this, as over half of its customers utilize at least five modules.
| Number of Modules Customers Are Using | Percent of Customer Base | YOY Growth |
|---|---|---|
| Five or more | 62% | 52% |
| Six or more | 39% | 62% |
| Seven or more | 22% | 75% |
Data source: CrowdStrike. YOY = Year over Year
Snowflake's customer spending expansion plan comes from customers consistently utilizing their products and finding new uses for data analysis. To measure this performance, Snowflake looks at how much existing customers spent two years ago, then compares it to how much they spent over the past year.
For Q4 of FY 2023 (ending Jan. 31), clients spent $158 this past year for every $100 they spent two years ago. This is a world-class performance by Snowflake, as CrowdStrike's revenue retention metric for Q4 of FY 2024 (also ending Jan. 31) was $125 for every $100.
NYSE: SNOW
Key Data Points
CrowdStrike may have the edge when it comes to consistency, but Snowflake is surpassing CrowdStrike in the customer expansion department (even though CrowdStrike is still doing quite well). However, this success comes with a steep price.
CrowdStrike is valued much lower than Snowflake
When looking at each stock's valuation, you need to use the price-to-sales ratio, as each company isn't profitable from a GAAP (generally accepted accounting principles) viewpoint. Neither company is particularly cheap, but Snowflake is valued at nearly twice that of CrowdStrike.
CRWD PS Ratio data by YCharts
Because of that, if you buy one share of Snowflake stock, you're paying the equivalent for the company of 1.66 CrowdStrike shares. So, what you have to ask yourself as an investor is: "Does Snowflake demand that much of a premium to CrowdStrike?"
For me, the answer is no. In Q4, Snowflake grew its product revenue by 54%, while CrowdStrike increased its annual recurring revenue by 48%. That's barely a faster growth rate, so in my eyes, Snowflake shouldn't be valued that high, or CrowdStrike should be valued closer to Snowflake. Regardless, CrowdStrike is the cheaper stock for a similar amount of growth.
All this means I think CrowdStrike makes for a better buy than Snowflake.
