Before I give you potential reasons to invest or not in CrowdStrike Holdings (CRWD -3.09%) stock right now, allow me to explain why CrowdStrike is a compelling company in the first place, regardless of whether you buy shares today or choose to wait.
A growing business in a growing industry
Valued at over $150 billion and growing fast (according to Fortune Business Insights), the cybersecurity space is a fertile hunting ground for good investment opportunities. For its part, CrowdStrike appears to be taking advantage of the growth in its space. In its fiscal first quarter of 2024 (which ended in April), the company generated revenue of $693 million. That's more than double its revenue in the same quarter just two years ago.
CrowdStrike grows by adding new customers. However, it also grows because customers adopt more products over time. In all, the company has about two dozen different software products, and customers are increasing their adoption rates. In Q1, 23% of its customers used seven or more of its products, up from 22% in the prior quarter.
Clearly, there's still plenty of room for CrowdStrike's revenue to grow as its existing customers subscribe to more software modules over time. That's bullish for the top line but also for the bottom line. After all, it costs less in marketing to upsell an existing customer than to find a new customer altogether. Moreover, since it's a software business, there's little incremental cost when customers subscribe to additional modules, which boosts profitability.
That's what we're seeing play out with CrowdStrike's numbers. Revenue growth is fantastic, as noted. But growth in gross profit and cash from operations outpaced revenue growth, which is what you want to see. Here's the three-year chart for reference.
CRWD Revenue (TTM) data by YCharts
To summarize, CrowdStrike could be a market-beating investment because it has plenty of opportunity for growth and because it gains operating leverage as it grows. However, there are more things to consider with this investment today.
The green flag in 2023
As mentioned, cybersecurity is such a big and growing industry that I believe investors need to be invested in the space. There will be big winners. But how can investors be sure CrowdStrike is one of the winners? Well, there's the aforementioned revenue growth. But there's more evidence of CrowdStrike's leading position.
In the conference call to discuss Q1 results, CrowdStrike's management shared a mind-blowing statistic. One of CrowdStrike's biggest competitors is tech giant Microsoft. And according to CrowdStrike, when potential customers try products from both companies, they wind up subscribing to CrowdStrike's services 80% of the time.
This strongly suggests that CrowdStrike will not simply grow alongside the cybersecurity industry, but that it will also take market share.
The red flag in 2023
Recent data may suggest that CrowdStrike is poised to grow over the long term. But additional data paints a more muted picture for the company in the coming year.
CrowdStrike's financial results can be measured in multiple ways. When it delivers an agreed-upon service, it can recognize revenue. However, it signs long-term contracts with customers. When customers sign contracts, they're invoiced by CrowdStrike. And the value of these invoices is known as "backlog" until the contract period starts.
In Q1, CrowdStrike's backlog fell from $1.01 billion in the previous quarter to $911 million. To be fair, the company's backlog can fluctuate from quarter to quarter. And indeed, it dropped sequentially in the same quarter of last year.
However, CrowdStrike's remaining performance obligations -- the total value of all outstanding services under contract -- consistently track higher. But in Q1, CrowdStrike's remaining performance obligations dropped from almost $3.4 billion to $3.3 billion.
Simply put, businesses are more apprehensive right now to spend money on cybersecurity because of macroeconomic conditions. This is reflected in CrowdStrike's numbers. And it's why management is guiding for its slowest growth ever for the remainder of its fiscal 2024.
Is CrowdStrike stock a buy?
I believe investors can draw a few concrete conclusions when it comes to investing in CrowdStrike.
First, financial results won't be smooth for CrowdStrike -- the drop in remaining performance obligations and its slowest-ever growth rate are evidence of this.
Second, CrowdStrike's ability to outperform the stock market isn't guaranteed. With a market capitalization of $37 billion, the stock trades at a pricey valuation of over 12 times forward sales. The longer the slowdown in its business lasts, therefore, the more likely the market will grow impatient.
Finally, for patient investors, CrowdStrike has many favorable qualities for a long-term investment in a diversified portfolio. The industry is growing, CrowdStrike could be taking market share, and its margins are improving with scale. This encapsulates why I'm still comfortable buying CrowdStrike stock today.
