The cybersecurity landscape is both crowded and fragmented. While big tech firms such as Microsoft and Alphabet offer comprehensive security services, the broader market seems to be dominated by small- and mid-cap players.
One such company is CrowdStrike (CRWD 2.03%). While the company faces stiff competition, CrowdStrike's financial and operating results demonstrate how it's separating itself from the pack. The company recently reported earnings for its first quarter of fiscal year 2024, which ended April 30. Let's dig into the results and understand why CrowdStrike deserves a look for your portfolio.
The competitive landscape is hot
IT research firm Gartner is well known for publishing a graphic it calls its "magic quadrant," in which companies of all sizes are benchmarked against one another in a specific industry. In December, Gartner released its results for endpoint protection platforms. CrowdStrike's primary focus is cybersecurity for endpoints such as work-issued laptops, phones, etc.
Per Gartner's research, CrowdStrike was positioned in the desirable top-right corner, an area representing companies that have both well-thought-out and complete visions and strong abilities to execute. To put this in perspective, CrowdStrike was ranked only below Microsoft and well above its primary competitor SentinelOne.
What I find amazing is that CrowdStrike was also ranked higher than titans like Cisco, Palo Alto Networks, and VMware. The market capitalizations of Palo Alto Networks and VMware are $70 billion and $60 billion, respectively. CrowdStrike is about half that size, at $36 billion as of the time of this writing.
While market capitalization is not necessarily a good indication of value, the point is that there are several companies far larger with presumably more resources than CrowdStrike, yet this same cohort is ranked significantly lower on the magic quadrant.
Image source: Getty Images
Q1 results at a glance
In addition to generally accepted accounting principles (GAAP) financials, CrowdStrike also reports a number of non-GAAP key performance metrics. Perhaps the most important non-GAAP figure that CrowdStrike reports is annual recurring revenue (ARR).
CrowdStrike generates revenue from two sources: software subscriptions and professional services. Software subscriptions are considered recurring revenue, while professional services are categorized as nonrecurring revenue. Investors should be scrutinizing growth in recurring revenue more closely because it carries much higher margins than professional services.
For the three months ended April 30, CrowdStrike reported total revenue of $692 million, 42% higher than the prior-year period. Interestingly, software subscription revenue came in at $651 million, which was also 42% higher than Q1 2022.
Growing your top line by more than 40% annually is impressive in any industry. However, given the majority of CrowdStrike's business is high-margin recurring subscriptions, this level of growth should not be taken for granted. The company grew its ARR to $2.7 billion, having added $174 million of net new ARR during the quarter.
Although revenue and ARR growth deserve a round of applause, it's CrowdStrike's ability to generate and manage cash flow that is the real prize. For the quarter ended April 30, the company reported net cash from operations of $301 million, an increase of 40% year over year. Moreover, free cash flow came in at $227 million, an increase of 45% year over year.
Revenue is growing more than 40%, fueled by software subscriptions, which augment ARR. Moreover, cash flow is growing in lockstep, illustrating the company's disciplined approach to spending and ability to bolster its balance sheet. To put it bluntly, this was a fantastic quarter all around.
The stock is a no-brainer buy
CrowdStrike is not yet consistently generating positive net income. For this reason, price-to-earnings (P/E) is not a reliable valuation metric.
As of the time of this writing, CrowdStrike trades at 14.7 times its trailing-12-month sales (P/S). By comparison, competitor SentinelOne trades at 9.3 times P/S. Larger, more mature firms Palo Alto Networks and VMware trade at 11.8 times and 4.5 times P/S.
One thing is clear here: CrowdStrike trades at a premium compared to both larger and smaller competitors. Given its ranking in the magic quadrant, coupled with its ability to generate double-digit growth in revenue and cash flow, this isn't entirely surprising.
CrowdStrike's stock is trading right in the middle of its 52-week high and low. Given the stock is far off its highs, I do not think that buying now would trap investors into a momentum play, despite the stock being up a whopping 48% year to date. A lot of this movement can be attributed to macroeconomic factors. More specifically, tech stocks, and the Nasdaq in particular, have enjoyed some positive momentum throughout 2023.
CrowdStrike's performance is best in class, and long-term investors should be eager to scoop up some shares of the company at this valuation.
