Cybersecurity company CrowdStrike Holdings (CRWD 2.03%) has been a winner, outperforming the S&P 500 since its 2019 IPO despite a tough past two years for growth stocks.
Fortunately, CrowdStrike has the ingredients of a winner that can keep winning, making the stock worth considering -- especially as it sits 55% off its high today. Here are three green flags that point to continued success for this next-generation security stock.
#1: Rapidly expanding addressable market
CrowdStrike is a cybersecurity company that sells cloud-based protection for endpoints (any network-connected computer or device). Every device on CrowdStrike's platform is part of an AI-powered threat graph that processes trillions of signals weekly, like a living network. When a threat emerges and is dealt with, the network learns and applies that to the rest of the devices in the threat graph.
That creates a network effect that makes CrowdStrike's platform more effective as more devices use it, training it with increasing amounts of data. CrowdStrike has expanded its platform over the years, starting with endpoint security and steadily branching out into areas like log management and identity security over time.
Offering more products expands CrowdStrike's total market opportunity. Management estimates its potential market has gradually grown from $25 billion at its IPO and will reach $158 billion by 2026. CrowdStrike did $2.2 billion in revenue over the past year, so there is still a lot of room for expansion in a growing (but highly competitive) industry.
#2: Successful customer cross-selling
CrowdStrike's land-and-expand growth strategy has worked very well. The company sells its services in product modules, letting customers pick and choose what protections they want. The company has 23,019 subscription customers today, with 62% using five or more modules and 22% using at least seven.
Enterprises can address their security needs with CrowdStrike as product offerings grow, which creates a built-in growth mechanism for CrowdStrike, which can grow through cross-selling and by adding new accounts along the way.
The recipe has generated a robust dollar-based retention rate (DBRR), which tells you how much customers are increasing their spending. CrowdStrike's DBRR is typically between 120% and 130%, meaning it could grow revenue by 20% to 30% without adding new customers.
#3: Deep pockets to continue investing in growth
Perhaps most important for CrowdStrike, the business is growing profitably. Technically, CrowdStrike is operating with negative net income due to stock-based compensation. However, the company is generating tremendous free cash flow, converting roughly $0.32 of every revenue dollar into cash profits. That should tell investors that CrowdStrike is purposefully showing a loss to build up cash for growth investments. If it wanted to, it could pay employees cash salaries and show a bottom-line profit at the expense of cash flow.
This adds to a balance sheet that is flush with almost $2 billion in net debt (total cash minus debt) -- plenty of money to continue strong marketing efforts or make a strategic acquisition when the opportunity presents itself.
CRWD Revenue (TTM) data by YCharts
CrowdStrike should continue delivering on its winning recipe of growth and investment returns. Today the stock trades at a free cash flow yield of 2.2%, near its highest since its IPO. In other words, investors are almost getting more cash profits for their investment than ever before -- so consider adding this cybersecurity standout to a long-term growth-focused portfolio.
