Most technology stocks haven't been hot for a couple of years now, but don't let market sentiment keep you from finding tomorrow's big winners. Growing companies that continue executing will lead the next bull market when the tide inevitably turns.
Cybersecurity company CrowdStrike Holdings (CRWD +1.77%) could lead the pack. It has created a recipe for stellar growth on its top and bottom lines.
Consider buying shares while the sale is ongoing -- the stock is still down 50% from its all-time high. Here is why CrowdStrike could produce market-beating returns over the coming years.
Next-generation performance
Antivirus software used to be the gold standard for cybersecurity. You would install software with a database of known viruses and threats that it would look for on your computer. But today's threats are far more sophisticated and need more complex solutions. CrowdStrike is part of this next-generation defense against threats.
NASDAQ: CRWD
Key Data Points
It delivers cloud-based protection services through a combination of artificial intelligence, machine learning, and analytics to proactively hunt for suspicious files or abnormalities.
All of CrowdStrike's protected endpoints (connections to a network such as computers, phones, etc.) are linked to its threat graph, which the company actively monitors. When it discovers a threat, the company updates the threat graph so that the same threat will be detected elsewhere. In other words, its security is being trained in real-time by the entirety of its customer base.
This isn't just proactive protection versus something reactive like antivirus software; it learns more and improves as its threat graph connects to more devices. As a result, the product arguably gets better as more use it. Technology consultant Gartner has named CrowdStrike a leader in endpoint protection for three consecutive years.
Excellence on the top and bottom lines
CrowdStrike has built its annual revenue to $2.2 billion. The growth has slowed, but that's expected as the numbers become more significant. Notably, the company is growing profitably. Free cash flow over the past year is nearly $675 million, or 32% of revenue.
CRWD revenue (TTM) data by YCharts. TTM = trailing 12 months.
The cybersecurity sector is competitive, so generating cash flow is a tremendous advantage because it can be reinvested to keep growing the business. The company has about $2.7 billion in cash to spend, and that war chest grows every quarter.
A reasonable price for years of earnings growth
But the big win for investors are the years of strong earnings growth CrowdStrike will likely produce. Some companies grow for years before turning a profit, but you can already value CrowdStrike on earnings. Analysts believe the company's earnings per share (EPS) will increase by nearly 50% annually in the years to come.
That estimate holds water based on how quickly revenue is now growing, outpacing expenses. The cash CrowdStrike already has is almost enough to repurchase 10% of its shares, so it wouldn't surprise me to see stock buybacks announced down the road if management doesn't have an immediate need for all that money.
CRWD PE ratio (forward) data by YCharts.
A forward price-to-earnings ratio (P/E) of 58 isn't so expensive when earnings grow 50% annually. That P/E will be just 17 in three years, and earnings could still have many years of double-digit growth beyond that.
Compare that to a traditional value stock like PepsiCo, which trades at a P/E of 26 but should grow earnings by just 8%. In three years, it would still trade at a P/E of 21.
CrowdStrike might not be the household name that PepsiCo is, but the company's rapid growth and substantial cash profits make it a bargain at its current valuation. As a result, investors buying for the next five-plus years should feel good about the stock today.
