While many companies brag about artificial intelligence (AI) capabilities or how they are working to integrate it into their offerings, few have built their software from the ground up utilizing AI. That's why companies like CrowdStrike (CRWD +0.01%) have a distinct advantage over the competition, as AI becomes a key selling point.
It's also worth noting that CrowdStrike appears to have an upper hand over its competition, at least according to some of its accolades. But does all that translate into a stock that's worth owning? Let's find out.
A top-tier headliner offering leads to the addition of more products
CrowdStrike's primary offering focuses on a subset of cybersecurity known as endpoint protection. This area is about protecting any device that accesses a network, like phones or laptops. By securing these devices, businesses can avoid the vast majority of threats that cyber attackers attempt to exploit. The reason CrowdStrike's offering is so good is that it uses AI to monitor all the signals within a network continuously and evolves the program to adapt to an ever-changing environment. When it detects a threat, it can automatically respond and shut that access point down before any damage is done.
Third-party Gartner (IT +3.83%) recognized CrowdStrike as a leader in this space. CrowdStrike is in the top two of the rankings, right next to software giant Microsoft (MSFT 1.57%). Still, the IDC found CrowdStrike held the highest endpoint market share for the third consecutive year in 2022.
But endpoint protection is just how CrowdStrike started. It also offers cloud workload security, threat intelligence, and identity protection. As it builds out these offerings, I'd expect it to gather accolades in these areas, too, as CrowdStrike's customers seem to find value in using many of them.
| Number of Modules Customers Are Using | Percent of Customer Base | YOY Growth |
|---|---|---|
| Five or more | 62% | 52% |
| Six or more | 39% | 62% |
| Seven or more | 22% | 75% |
Data source: CrowdStrike. YOY = year over year
With CrowdStrike's customers signing up for a few offerings, then quickly expanding to use multiple ones, it's a great sign that the company can upsell its clients. It's also convenient for the customers, as they can get multiple necessary products from one vendor, making system integration much more straightforward.
This expansion level is helping CrowdStrike outperform the competition and trickling down to its finances.
CrowdStrike's stock is reasonably valued compared to one competitor
In the fourth quarter of fiscal year 2023 (ending Jan. 31), CrowdStrike's annual recurring revenue (ARR) rose 48% to $2.56 billion. Its customer count also increased by 41% in FY 2023, reaching more than 23,000 clients after having only 2,500 just five years ago.
As existing customers expand what products they use, it affects CrowdStrike's retention rates, which were 125% in Q4. This means that for every $100 spent last year, these clients spent $125 this year, showing expansion is a key growth driver.
Even when enterprise spending levels were down in the face of a potential recession, CrowdStrike's product made the list of top priorities, which keys investors into how vital a top-notch cybersecurity platform is.
But for all that performance, is the stock overvalued? I'd say no.
As mentioned above, Microsoft is a key competitor in this space, but CrowdStrike is growing much faster because it's a much smaller company. Still, the market values these companies on a similar level.
CRWD PS Ratio data by YCharts
While CrowdStrike is valued higher than Microsoft using trailing metrics, it's undervalued when you utilize forward-looking ones.
| Company | Forward Price-to-Sales | Forward Price-to-Free Cash Flow |
|---|---|---|
| CrowdStrike | 10.8 | 36.0 |
| Microsoft | 11.0 | 39.7 |
Data source: YCharts.
So with CrowdStrike trading for a cheaper forward level than Microsoft is, plus massive growth even past one year (forward-looking metrics only account for the next year of growth), CrowdStrike's stock looks like a fantastic buy right here.
It's wise to invest in the best-in-class companies, and CrowdStrike is no exception. Couple that with impressive growth rates and a reasonable valuation, and CrowdStrike should be at the top of every growth investor's shopping list.
