Although CrowdStrike (CRWD 2.03%) has been a decent stock to own this year (it's up roughly 20%), it has essentially matched its benchmark technology index, the Nasdaq-100 (up 19% in 2023). However, this market performance could be a buying opportunity, as the stock hasn't seen the rocket-like run-ups other tech companies have.
With the stock at around $125 today, hitting $200 might seem like a stretch. But if you look at the financials, it doesn't seem as far-fetched. Here's a closer look at why CrowdStrike could be heading higher and why it's a top stock in today's market.
CrowdStrike has plans for massive product expansion
CrowdStrike has a wide-reaching cybersecurity platform, but it all centers around one offering: endpoint protection. This facet of cybersecurity focuses on devices used to access a network, like a laptop or a cellphone, and protects them from external threats. This is CrowdStrike's bread and butter, and it recently received the 2023 SE Labs award for best endpoint detection and response for the third consecutive year.
But its solutions don't stop there. CrowdStrike has many other products, including extended detection and response (XDR), cloud security, identity protection, and observability.
In fact, 62% of customers use five or more of its products, while 22% use seven or more. This demonstrates how useful the platform is: Customers sign on for one of them, then quickly expand their use to create an encompassing cybersecurity solution.
CrowdStrike is also innovative and is consistently launching new products to capture what it thinks is a $76 billion total addressable market. On April 25, it announced the first XDR and threat detection product for ChromeOS, Alphabet's proprietary system.
That's just one example of the many products CrowdStrike has launched, and it plans to release a lot more. It estimates its addressable market for its current portfolio to be $76 billion, but by 2026, the company plans to have an array of new products that expand its market to $158 billion.
Some of that growth will come from the general business trend to have top-notch cybersecurity to fight ramped-up attacks, but most of it will come from new products.
With CrowdStrike's continuous innovation and success, the business looks like a strong buy, but what about the financials?
How can CrowdStrike produce excess cash but also be unprofitable?
With such a massive market, it's not surprising the company wants to capture as much of it as possible while sacrificing profits. In the fourth quarter of the 2023 fiscal year (ended Jan. 31), CrowdStrike's annual recurring revenue increased by 48% to $2.56 billion. With growth numbers like that, most investors don't mind if it's unprofitable.
Even though it lost money in the fourth quarter, it wasn't that big a loss -- $48.9 million against revenue of $637.4 million, an 8% loss. Plus, CrowdStrike could operate at a loss indefinitely because it is free-cash-flow (FCF) positive.
So how can a company operate at a loss yet produce extra cash? It all has to do with stock-based compensation. Because CrowdStrike compensates its employees generously with stock (it paid out $152.3 million in stock during the fourth quarter, about 24% of revenue), it can subtract that figure when calculating cash flow, as it isn't a cash expense.
But due to accounting rules, that expense must be included in a company's statement of operations, causing CrowdStrike to look like it lost $48.9 million in the fourth quarter while producing $209.5 million in FCF. Regardless, because CrowdStrike is FCF positive, it is a financially healthy company growing rapidly (FCF was up 65% in the fourth quarter).
This year is expected to bring more of the same, as revenue is expected to rise 33%. In 2024, Wall Street analysts expect revenue to grow by 29.1%. So in two years, its sales are expected to increase by nearly 72%.
The stock is at roughly $125, so it would take a 60% rise to reach $200. With the stock's price-to-sales (P/S) ratio at a reasonable level for its growth, it's not unreasonable to tie its stock performance to its potential revenue growth.
CRWD PS ratio data by YCharts.
CrowdStrike trades near its lowest valuation as a public company, so even though it's expected to have at least two strong years, it looks like a bargain at these levels. With massive expansion planned as well, it seems pretty evident that the stock can hit $200 in two years if it maintains its current trajectory.
