There's a consensus that artificial intelligence (AI) holds incredible promise to transform multiple segments of the economy as well as the world. Unfortunately, along with all that promise comes additional consensus that the rise of AI will also usher in all sorts of new cybersecurity challenges from radically advanced technologies that could be used for destructive purposes. Bad actors are already using generative AI technologies to carry out cyberattacks, and it's virtually certain that the use of these technologies will continue to ramp up.
With AI giving cybercriminals a wide range of versatile new tools, demand for high-performance cybersecurity protections should soar over the next decade and beyond. There's likely a big opportunity here for the companies that can provide it and for those companies' investors.
CrowdStrike is ahead of the curve in cybersecurity AI
CrowdStrike's (CRWD 2.03%) Falcon platform is a unified cybersecurity solution that delivers next-generation antivirus protections, endpoint-device detection and response, and threat-hunting services. Falcon's tech helps keep networks safe and prevent computers, mobile devices, servers, and other hardware from being exploited. It's providing best-in-class identification and protection performance and is helping businesses and institutions keep up with the evolving threat landscape.
Through its cloud-native platform, CrowdStrike is able to provide better data access, analysis, and information recycling compared to on-premise alternatives. The company's AI-powered threat detection models also continue to become increasingly advanced and capable as they encounter new threats.
Thanks to its "collect data once, reuse many times" approach, CrowdStrike is able to offer an ever-expanding array of protections for customers. When a new attack on a customer's network is identified by Falcon, the platform is able to build a profile on the threat that helps to fend off similar attacks on other customer networks.
Data gathered from an attack attempt on one client has the potential to benefit every other customer using Falcon, and CrowdStrike's protective capabilities continue to improve as the business scales up.
A category leader delivering rapid sales growth
The cybersecurity industry remains highly fragmented, but CrowdStrike is the leader in its corner of the market and attracts new customers at a robust pace. At the close of the company's last fiscal year (ended Jan. 31), the company had more than 23,000 customers, an increase of 41% year over year. Only four years earlier, the software specialist counted just 2,516 customers on its rolls.
CrowdStrike also does an impressive job of expanding business relationships with existing clients. The company once again exceeded its target for net revenue retention (NRR) of 120% in this year's first quarter, which means that existing customers increased their spending more than 20% year over year on average in the quarter. It also managed NRR above 125% in each quarter last year.
By attracting new customers and selling more services to those already using its platform, CrowdStrike amassed a dependable base of recurring revenue. It looks like the company should be able to continue building this sales foundation at a healthy clip.
Annual recurring revenue (ARR) grew 42% year over year in its first quarter to reach $692.6 million. Management expects to reach $5 billion in ARR by January 2026, good for growth of roughly 83% from its most recently reported level.
Strong margins point to huge profit potential
Thanks to its asset-light business model and highly scalable software solutions, CrowdStrike is posting impressive margins and growing adjusted earnings at a rapid clip. With a strong gross margin of 78% in the first quarter and revenue increasing 42% year over year to reach that $692.6 million figure, the company was able to grow adjusted earnings by roughly 84% year over year to reach $0.57 per share.
CrowdStrike has also been serving up strong adjusted free cash flow (FCF). The company increased its adjusted FCF 44% year over year to reach $277 million in the first quarter, and it recorded an adjusted FCF margin of at least 30% in each of its last three fiscal years. Management expects to match that benchmark again this year.
With the company currently valued at roughly $36 billion, CrowdStrike stock trades at approximately 40 times the $900 million in adjusted FCF it expects to generate this year.
CRWD PE ratio (forward) data by YCharts. PE = price to earnings.
It's also trading at roughly 63 times expected earnings. That kind of growth-dependent valuation puts the stock at risk of volatile trading in the event of macroeconomic pressures or business-specific performance shortfalls, but it also leaves plenty of room for long-term upside.
Even with some customers taking a more cautious approach to contract expansions due to the uncertain economy, CrowdStrike expects to grow adjusted FCF and adjusted earnings by roughly 33% and 54% this year, respectively. Crucially, it looks like the company's growth story is still just heating up.
CrowdStrike's technologies and market positioning make it a smart tandem play on the evolution of AI and rising demand for cybersecurity services. With the stock still trading at a 49% discount compared to the high that it reached in November 2021, I think that shares stand out as a buy-and-hold investment at today's prices.
