On April 11, cybersecurity specialist CrowdStrike Holdings (CRWD -3.09%) introduced what it says is an unprecedented product. The company is frequently referred to as an endpoint detection and response (EDR) platform, although management equally talks about extended detection and response (XDR) -- more on that in a moment. And now, CrowdStrike is bringing its expertise to the Internet of Things (IoT).
According to management, CrowdStrike is the first company to offer a purpose-built XDR cybersecurity product for IoT. Here's what that means for investors.
Cybersecurity and the Internet of Things
At one point, "the IoT" was as buzz-worthy among investors as terms like the metaverse and artificial intelligence are today. While the buzz has now faded, the IoT market is still alive and well.
The IoT trend is well underway, but it's poised to grow further as more things are enhanced with internet capabilities. Grand View Research predicts a compound annual growth rate (CAGR) in the IoT market of nearly 13% through 2030, giving it a future value of $220 billion. For its part, Fortune Business Insights expects a faster 26% CAGR, leading to a market valued over $500 billion.
The point is that the IoT is big and getting bigger, meaning enterprises will have more and more IoT devices. But having devices connect to the internet does pose a cybersecurity problem, as these devices represent another potential vulnerability in a system. And that's why CrowdStrike needs to address the problem if it's going to offer customers a comprehensive package.
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As mentioned, CrowdStrike is known as a cloud-based player in endpoint cybersecurity. And an endpoint is just anything that connects to a network. Traditionally this implies a human component -- a person using a computer or a mobile device -- but an IoT device operating independently of a person can also be an endpoint.
That's EDR cybersecurity in a nutshell. For its part, XDR goes a step beyond EDR. XDR uses information from EDR, but also incorporates cybersecurity information from other sources to provide more context and better insight.
With its new product, CrowdStrike will be taking IoT information and incorporating it into its overall XDR platform. The company hopes that this way data will have adequate context, have interoperability with other cybersecurity information, and be easy to use.
What this means for CrowdStrike investors
News items like this aren't actionable for investors in and of themselves. Rather, they need to be measured against an investment thesis -- a concise statement that explains what will create long-term shareholder value.
For me, CrowdStrike's investment thesis goes something like this: According to a recent report from McKinsey & Company, the cybersecurity market is worth between $1.5 trillion and $2.0 trillion. With only $2.24 billion in trailing-12-month revenue, CrowdStrike has barely penetrated this massive opportunity.
However, the company should grow very fast as it gets customers to spend more money: It has 23 cybersecurity modules but only 22% of customers use seven or more, providing an easy path to outsized growth. Therefore, over the next decade, I anticipate that CrowdStrike will have enough revenue growth for its stock to outperform the market.
Of course, not everything is picture-perfect for CrowdStrike. It still has negative income from operations. And shares trade at a very expensive price-to-sales ratio of 14. In my opinion, that's why revenue growth is so important to a CrowdStrike investment thesis: It needs that growth to justify its lofty valuation and turn operating losses around.
CRWD PS Ratio data by YCharts.
That's my take on CrowdStrike stock, so I look at its IoT announcement favorably. It's not enough to make CrowdStrike stock a winner on its own, but it's another opportunity for growth, which is what the company needs.
I view its March deal with Dell Technologies in the same way. CrowdStrike wants to secure as many endpoints as possible, and there are 50 million small and medium-sized businesses with five to 250 endpoints -- a massive opportunity. The problem is that it's expensive to market to smaller players. But CrowdStrike's partnership with Dell allows it to go after this demographic more efficiently. Therefore, it's an opportunity for revenue upside and greater profit potential, both of which are important to the investment thesis.
CrowdStrike's product is subscription-based, and it ended its fiscal 2023 in January with annual recurring revenue (ARR) of $2.56 billion. Management expects ARR to roughly double over the next three years. From everything we've looked at here, I'd say the company is well on its way to achieving this goal. And in my opinion, that would put the stock on a market-beating path.
