CrowdStrike (CRWD 2.20%) has become one of the best ways to invest in cybersecurity since going public in 2019. In fact, if you had invested $1,000 at its IPO, you'd have roughly $2,300 today, far more than the near $1,800 you'd have if you'd invested in the Nasdaq 100.
However, at its peak in 2021, CrowdStrike turned $1,000 into $5,055. So can its stock regain those highs? Or are investors stuck at a lower -- but still impressive -- rate of return? Let's take a look.
CrowdStrike's two-pronged growth strategy
CrowdStrike is a leader in endpoint security, which protects network access points such as phones or laptops. Third-party entities like the International Data Corporation (IDC) have ranked the company at the top of the endpoint market share for three years in a row, and SE Labs named it best in endpoint detection and response for the third consecutive year, which speaks to CrowdStrike's prowess.
But CrowdStrike isn't stopping at endpoint security. It has launched multiple products that add to its base capacity, like identity threat protection, cloud workload protection, and log management observability, making the company a go-to place for multiple cybersecurity solutions. With over 20 different products, CrowdStrike's platform is increasing its reach.
This has been a winning strategy for CrowdStrike for two reasons. First, it has powered strong customer growth. In fiscal year 2023 (ending January 31, 2023), CrowdStrike's customer base grew 41% to 23,019. Among those clients are 556 of the Global 2000 companies and 271 of the Fortune 500, which shows CrowdStrike still has a large customer cohort to capture.
Second, CrowdStrike has masterfully upsold its products to existing clients, with over half its customer base using at least five products from its lineup.
| 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
With new customers rapidly joining the platform and old ones spending more, this has translated into solid revenue growth for CrowdStrike.
The company is rapidly growing at the expense of profitability
A key revenue metric to watch is annual recurring revenue (ARR). This only includes subscription revenue without professional service revenue, which helps clients onboard or upgrade their systems. By removing the fluctuating revenue, investors get a better picture of how the recurring part of the business generates money. ARR was up 48% to $2.56 billion in Q4 of FY 2023 (ending Jan. 31), showcasing CrowdStrike's strong growth.
Furthermore, CrowdStrike produced $209 million in free cash flow (FCF) -- a 33% margin. However, the company is unprofitable on an earnings basis due to stock-based compensation.
Because stock-based compensation is a non-cash expense, FCF doesn't include it. Still, not accounting for it is a mistake, because CrowdStrike paid its employees $152 million in stock during Q4 (about 24% of revenue). Furthermore, that figure was up 64% in Q4, much faster than revenue rose.
This indicates that CrowdStrike isn't worried about becoming profitable immediately, which some investors might not like. As interest rates rise, investors are less likely to take risks with highly valued companies, a primary factor in CrowdStrike's valuation tumble over the past year and a half.
CRWD PS Ratio data by YCharts.
So while CrowdStrike's stock made investors a ton of money in just two years, the economic outlook changed, which caused its performance of $1,000 invested in 2019 to tumble from $5,055 to roughly $2,300.
CrowdStrike could turn this performance around in two ways.
- It could continue to grow rapidly, justifying its unprofitability and capturing a lot of market share.
- It could cut its expenses and take what market share it has to move closer to profitability.
For long-term shareholders, the first option is more attractive because it ignores the short-term environment while focusing on the bigger picture. This will yield more significant gains (if CrowdStrike can continue growing), but we'll have to be patient. Although the stock isn't as cheap as when 2023 started, it still looks attractively priced compared to its historical valuation.
I'm confident in CrowdStrike's prospects, but you must take the long-term view for its current business state to make sense.
