The world's cybersecurity needs are rapidly expanding. Protecting digital assets is of paramount importance to companies, no matter the financial climate. Organizations of all types want to avoid breaches, downtime, and the expenses of restoring their systems following breaches, malware, and ransomware attacks. This is why CrowdStrike's (CRWD 2.82%) sales are booming even as companies generally look to cut expenses due to the challenging economy. Scrimping on security is too costly in the long run. So while no company is recession-proof, CrowdStrike is definitely recession-resistant.
Its artificial intelligence (AI) powered cloud-native Falcon security platform is the market-share leader in endpoint security (edging out Microsoft) and provides many other services, such as threat intelligence and antivirus. Demand for endpoint protection skyrocketed during the pandemic as remote working took off. The hybrid work trend is here to stay, and the overall cybersecurity market is rapidly expanding. Statista estimates that the market will reach $162 billion in revenue this year and continue growing at a compound annual rate of nearly 10% through 2028, as the chart below illustrates.
Source: Statista.
CrowdStrike estimates the total addressable market for its products will be near $100 billion in three years, giving the company massive room for growth.
Customers flock to CrowdStrike and few leave
Subscription customers are the key to CrowdStrike's success. Investors favor businesses with subscription models because those generate recurring revenues. CrowdStrike's subscription customer base has expanded nearly tenfold in four years.
Data source: CrowdStrike. Chart by author.
Its average customer provides about $110,000 in revenue annually, based on the $2.56 billion in annual recurring revenue CrowdStrike reported last quarter. Even better, it has a dollar-based net retention rate (the measure of sales growth among existing customers) of over 120% since back in 2019. This "land and expand" strategy means that once customers sign on, they tend to increase the amount they are spending for CrowdStrike's services each year.
Attracting new customers is one thing, but the strategy is only effective if they stay. CrowdStike retained 98% of its customers last quarter and has held onto more than 97% each quarter since 2019. Customers clearly love its services, which is a fantastic sign for shareholders.
Where will CrowdStrike stock be in three years?
CrowdStrike is creeping toward profitability as sales increase, although significant GAAP profits are probably several years off. Its gross subscription margin is over 75%, and free cash flow is ramping up. CrowdStrike produced $677 million in free cash flow last fiscal year on 53% growth and a 30% margin.
Metrics are improving for CrowdStrike, but the stock is down 48% from its 52-week high.
Sales increased 54% in its last fiscal year, and the market demand and retention rates strongly suggest growth will continue. Management has guided for 34% growth this year, and if it grows by 25% annually after that, it will hit over $4.6 billion in annual sales in three years.
Even if the cybersecurity stock only maintains its current price-to-sales ratio -- which is near its all-time low -- it will double its market cap to over $60 billion in three years. Growth stocks like CrowdStike are most appropriate for long-term investors who don't mind moderate risk and volatility. If you are in the market for growth stocks to boost your portfolio's long-term returns, CrowdStrike should be high on your list.
