Artificial intelligence (AI) and machine learning (ML) have quickly become part of the everyday vernacular since the launch of the generative chatbot ChatGPT. But what exactly are AI and ML? In a nutshell, it refers to computers using data to improve tasks. The tech covers far-reaching applications from familiar chatbots to futuristic autonomous vehicles. Cybersecurity leader CrowdStrike (CRWD -3.90%) has leveraged this technology for years.
Cyber attacks cost businesses and governments billions of dollars each year, and the attacks are often sophisticated and constantly evolving. CrowdStrike's cloud-based Falcon platform analyzes trillions of bits of data daily. Then machine learning uses the data to optimize protection. Cyberattacks will become faster and more advanced with AI, so demand for CrowdStrike's platform will only increase.
CrowdStrike is the market leader in endpoint protection. It also offers services in threat intelligence, incident response, security operations, cloud security, and others. The continued migration of businesses to cloud-based models is another growth opportunity. In total, CrowdStrike expects to have an addressable market approaching $100 billion by 2025.
How does CrowdStrike make money?
CrowdStrike's platform is subscription-based. Customers pay an annual fee for services and customize them by choosing from modules. The subscription model is excellent for shareholders because it provides consistent and predictable revenue each period. It also means CrowdStrike can deploy a "land-and-expand" strategy. The company gains (lands) a customer, then forms a lasting relationship where the customer will add services and spend more (expand) over time.
More than 23,000 customers (a 41% improvement over last year) now trust CrowdStrike for security, including 70% of the Fortune 500. CrowdStrike is highly effective at monetizing customers as well, as shown by its retention rates below.
Image source: CrowdStrike.
A dollar-based net retention rate (DBNR) over 100% means that customers, on average, spend more each year. CrowdStrike has maintained a fantastic DBNR of over 120% since the first quarter of 2019. Customers also renew their subscriptions around 98% of the time. This shows the tremendous value that customers place on CrowdStrike's AI-powered security platform.
Speaking of making money...
Few companies can match the pace of CrowdStrike's recent annual recurring revenue (ARR) growth. ARR has grown 800% since the end of 2019 to $2.6 billion, as shown below.
Data source: CrowdStrike. Chart by author.
This revenue growth hasn't translated to profits according to generally accepted accounting principles (GAAP) yet -- and that's OK. CrowdStrike is focused on growth and probably won't produce significant GAAP profits for several more years. But there are hints that the company can be prolific as it scales. Free cash flow has more than doubled year-over-year since fiscal 2021 to $677 million in fiscal 2023 on a 30% margin. The gross margin of over 75% also suggests a path to profits. When assessing growth stocks, investors should know that they come with risks. CrowdStrike is most appropriate for long-haul investors with moderate risk and volatility tolerance.
CrowdStrike stock trades more than 30% off its 52-week high and 54% off its all-time high. It also trades near its lowest price-to-sales (P/S) ratio of 14. Growth stocks are out of favor due to the challenging economy, so more volatility is likely; however, the stock has tremendous long-term potential if management continues executing.
Cybersecurity solutions must leverage AI and ML to keep up with evolving threats. This is precisely what CrowdStrike's platform provides and why the company, and the stock, should be on the radar of every growth investor.
