Companies are always chasing growth. The most successful ones design their business models to provide them with multiple paths to attain that growth.
Their main path involves selling a physical product to a customer one time. The more customers, the more growth. A secondary path involves selling that product to the customer and then incentivizing the customer to buy the (hopefully upgraded) product year after year. The company goes after more customers to attain growth but also benefits from repeat sales growth.
Then there is the explosive growth path. That involves a business selling a product to more and more customers, making sure the product is on a subscription plan to attain year-after-year growth, and then upselling the customer to buy additional modules and features of the main product suited to individual needs. These additions are also sold on a subscription basis.
Not only can the business grow by attracting new customers, but it can also grow by retaining and upselling existing subscribers. This multi-pronged path helps explain the success of cybersecurity company CrowdStrike (CRWD 2.03%) and restaurant technology company Toast (TOST 3.42%) right now. It's also the main reason both companies (and their stocks) have explosive growth opportunities in 2023 and beyond.
The growth so far
Both companies have grown by leaps and bounds since going public -- CrowdStrike in 2019, and Toast in 2021. In its fiscal 2024 first quarter (which ended April 30), CrowdStrike grew its revenue 42% year over year. And in Q1 2023, Toast grew its revenue by 53%.
TOST Revenue (Quarterly YoY Growth) data by YCharts.
It's unlikely that either will maintain those growth rates -- indeed, the chart above shows some deceleration, and guidance from management assumes slower growth as well. However, just to put the current growth rates into perspective, CrowdStrike would nearly sextuple its revenue over the next five years at its current pace. For its part, Toast would more than octuple its revenue over the same time span.
Both have done well at attracting new customers. CrowdStrike had just 3,059 subscription customers at the end of its fiscal 2020 Q1. But at the end of its fiscal 2023, it had over 23,000.
Likewise, there were 30,000 restaurant locations using Toast's services back in the first quarter of 2020. But in Q1 2023, 85,000 restaurants were using its purpose-made restaurant software.
The ongoing growth opportunity
The good news for CrowdStrike and Toast is that they each have catalysts that should help them attract more new customers.
For CrowdStrike, its partnership with Dell Technologies will prove to be a good catalyst. Dell has many small and medium-sized business customers. By offering its cybersecurity services to those customers, CrowdStrike has a chance to scale its footprint up rapidly among companies of these sizes. CrowdStrike CFO Burt Podbere recently said he believes the Dell partnership is "something that will move the needle for us in the second half" of the year.
For its part, Toast's management shared an interesting stat that provides good reason for optimism. Once its software is used by 20% of small and medium-sized restaurants in a given market, the company's sales representatives have a higher win rate -- in other words, the more restaurants in a market that use Toast, the easier it becomes for the company to convince other nearby restaurants to use it too. If the pattern continues, momentum could really start building for Toast.
These are just a couple of examples of how CrowdStrike and Toast can keep growing by winning new customers.
The explosive opportunity for these two companies
New customers will provide some of the growth for these companies. But CrowdStrike and Toast have additional explosive opportunities because they can both do something simple: upsell their existing customers.
CrowdStrike offers its customers 23 software modules -- each to address a different cybersecurity need. Similarly, Toast has at least a dozen modules of its own.
Only 23% of CrowdStrike's customers used seven or more modules as of Q1 -- in other words, 77% of its customers could buy at least 16 more of its products. depending on need. It stands to reason that if CrowdStrike does a good enough job with the existing services, its customers will upgrade or consolidate cybersecurity services in the future.
Toast is in a similar situation. As of Q1, only 42% of its customers used six or more modules. Therefore, more than half of its customer base could still at least double the number of Toast's software modules they're using.
So there you have it. Both CrowdStrike and Toast have catalysts to acquire more new customers, providing growth. But both companies could experience explosive growth in coming years by retaining customers and getting them to use more products. And that's why I like both of these growth stocks today.
