An old adage says death and taxes are the two things we can count on, but a few more could be added to this list in the 21st century. One of them is the critical need for cybersecurity. Every organization, from large corporations to school districts, is under threat. Breaches cost companies billions in remediation and lost productivity. Luckily, incredible cybersecurity providers like CrowdStrike (CRWD 0.14%) are up to the challenge.
CrowdStrike's specialty is endpoint protection. Endpoints are anything that connects to a network, like desktop and laptop computers, phones, and many others. The number of endpoints multiplies in the modern world as people embrace remote and hybrid work and more devices harness the internet. But there's a catch: Endpoints are the source of 90% of cyberattacks. The need for protection is why CrowdStrike's annual recurring revenue (ARR) increased 42% year over year last quarter, even when companies are being careful with spending due to a potential recession.
The latest report from market research firm IDC shows CrowdStrike as the modern endpoint security market leader for the third straight year, claiming 18%. In comparison, rival Microsoft remains second at 16%. This $8.6 billion market is predicted to reach $20 billion by 2026. CrowdStrike has big plans to capitalize.
CrowdStrike has a lofty goal
Few companies can match CrowdStrike's ridiculous growth over the past few years. ARR has quadrupled over three years, as shown below, reaching $2.7 billion last quarter.
Data source: CrowdStrike. Chart by author.
CrowdStrike's management set an aggressive goal of reaching $5 billion ARR by fiscal 2026 -- just under three years away. Nearly doubling ARR is ambitious, but doable. CrowdStrike's sales will grow with the endpoint market and its Falcon platform provides cloud security, identity protection, and other services, putting its potential market near $100 billion.
The financial metrics support reaching the goal. CrowdStrike's customers spend more for its services each year, often by adding additional services or modules. The pace of this growth is measured by dollar-based net retention rates (DBNRs). Anything over 100% means the average revenue per customer increases. CrowdStrike's DBNR has exceeded 120% every quarter since 2019 and was over 125% for each quarter of fiscal 2023. Meanwhile, it calculates it will need to keep the DBNR between just 110% and 117% to reach its $5 billion milestone in three years. At this rate, the company will blow past this target.
Is CrowdStrike stock a buy now?
Besides the top-line revenue growth, CrowdStrike also:
- Increased its customer base from 5,431 at the end of fiscal 2020 to 23,019 at the close of fiscal 2023
- Counts 70% of the Fortune 100 and 54% of the Fortune 500 among them
- Produced $677 million in free cash flow last fiscal year on a 30% margin
- Has an enviable gross margin (76% last quarter) that suggests significant profit potential once the company scales
Of course, growth stocks also have risks. CrowdStrike isn't significantly profitable under generally accepted accounting principles (GAAP) yet, and may not be for several years, although its operating expenses as a percentage of sales have improved markedly recently. Growth stocks are also difficult to value because there are few direct comparables, making them volatile. Because of this, these stocks are best for long-haul investors with moderate risk tolerance.
CrowdStrike stock has every right to be flying high, given its recent results and potential, and it is up 44% year to date. However, it is still nearly 50% off its all-time high.
Also, its price-to-sales (P/S) ratio, depicted below, is only slightly higher now than during the March 2020 pandemic crash.
CRWD PS Ratio data by YCharts
Given its leadership position in endpoint protection, massive total addressable market, clear path to $5 billion ARR within three years, and historically low P/S ratio, CrowdStrike makes a compelling case for investors to pick up shares and hold for the next bull market.
