Spending on cybersecurity continued to grow rapidly through the economic uncertainty over the past year. With the emergence of remote work and cloud computing, it's imperative that businesses keep not only their main data systems secure, but also endpoint devices used by employees. These include desktops, laptops, mobile, and other remote devices. This has been a boon for CrowdStrike Holdings (CRWD -0.68%), one of the leading cybersecurity firms.
Following its initial public offering in 2019, share prices of CrowdStrike soared to an all-time high of $298 in 2021. While the company still reports strong demand for its Falcon platform, the market sell-off last year dragged the stock down 56% from its high.
The dilemma for investors deciding whether to pull the trigger is the company's weaker outlook for growth in the last earnings report. Let's look at the company's performance to determine if investors should take the plunge on this fallen high-flyer.
The stock is cheaper, with improving fundamentals
One factor weighing on the stock is a steady decline in annual revenue growth over the last three years. After posting top-line growth of 110% in 2019, the company reported 54% growth last year. We can already see why the stock started to drop with the broader market last year. CrowdStrike's slowing momentum pressured a stock that was priced for lots of growth.
The stock was trading at a nosebleed valuation of 60 times annual sales at its all-time high, but now trades at 13.5 times annual sales. That is still a premium against rival SentinelOne (S 1.84%), which I have previously favored, which reported revenue growth of 106% last year.
Data by YCharts
CrowdStrike offers its services as a subscription, which typically justifies paying a high valuation. SaaS (software-as-a-service) companies can generate much higher margins than the average company thanks to recurring revenue streams and upselling existing customers to add-on services.
Indeed, CrowdStrike is starting to see its free cash flow improve substantially. Over the last four quarters, it generated $674 million in free cash flow, more than doubling over the last two years. That increase makes the stock look more attractive, especially when SentinelOne is still reporting negative free cash flow.
Some investors might prefer SentinelOne's faster rate of revenue growth, but it's tough to turn down CrowdStrike when it's delivering a balance of both.
Data by YCharts
On a price-to-free cash flow basis, CrowdStrike stock trades for a multiple of 45. That's still expensive, but not when compared to the underlying business growth.
In the fiscal fourth quarter ending Jan. 31, CrowdStrike reported a 48% increase in both revenue and annual recurring revenue, a closely watched metric that indicates the current annualized value of customer subscription contracts.
The problem is that CrowdStrike is still seeing revenue growth decelerate. Management guided for revenue to increase just 33% this year at the midpoint of the estimated range.
However, the stock's 25% jump year to date suggests the market has already accounted for lower growth in the near term. It's the company's performance against an even bigger competitor that I believe makes the stock worth considering right now.
Competitively positioned for more growth
Some analysts are looking at that lower forecast in the context of increasing competition from Microsoft, and are taking a more cautious stance on the stock. But the concerns over competition appear overblown, considering that enterprise customers that test CrowdStrike's offering choose it over Microsoft 80% of the time.
Moreover, annual recurring revenue (ARR) from emerging products ended the year up 116% year over year. That puts ARR from new products at $339 million, which is greater than the $313 million in total ARR that CrowdStrike reported in 2019. This suggests CrowdStrike could significantly expand its business from simply cross-selling new products to existing customers over the next several years.
It can't be emphasized enough that CrowdStrike is still winning new customers at a good clip in the face of escalating competition. It added 1,873 net new subscription customers last quarter for a total of 23,019. What's more, the number of services, or modules, that new customers are adopting is also increasing. Management attributes this to growing brand recognition, expanding use cases, and the cost savings of its platform.
Should you buy the stock right now?
Cybersecurity is an attractive industry to look to for promising long-term investments. Rising security challenges mean that businesses are going to prioritize spending on this important market regardless of economic conditions in the near term. Plus CrowdStrike's strong growth is pointing to a big opportunity.
Given its discounted valuation, improving free cash flow, and recent success growing new services on the platform, I believe the negative market sentiment surrounding growth stocks right now is giving investors an attractive entry point to buy shares for the long term.
