The geopolitical landscape in certain parts of the world is fraught with danger right now, especially as it relates to technology. Behind the scenes, cybersecurity companies battle constantly against independent and state-sponsored cyber attacks. More visible cyber threats related to the war in Ukraine and the United States' relationship with China are being reported.
As the battles escalate, artificial intelligence (AI) and machine learning (ML) are being pulled into the mix more and more, for good and for bad. On the good side, CrowdStrike (CRWD 2.03%) is incorporating both technologies to assist its efforts to keep the attackers at bay.
This company was "AI" before AI was the thing to be. Let's look at how its efforts with AI will benefit shareholders big over the long haul.
CrowdStrike: 23,000 reasons for optimism
There are many ways to measure success for growth companies. For CrowdStrike, growth in customers may be the best way. Annual recurring revenue (ARR) comprises over 90% of CrowdStrike's revenue through subscriptions. And customers, on average, spend $119,000 yearly (many large customers spend millions). Subscription revenue is preferable because it is predictable and consistent. When CrowdStrike lands a customer, they don't just buy a product once; they buy it every year.
CrowdStrike is prolifically adding customers, as depicted below.
Data source: CrowdStrike. Chart by author.
Of course, these customer wins only matter if the customers stay. CrowdStrike retained 98% of its customers in the first quarter of fiscal year 2024 and has a gross retention rate of over 97% since 2019. This proves that the product works and customers are pleased. In addition, these customers spend more each year with CrowdStrike, as evidenced by its 120%-plus dollar-based net retention rate (DBNR: just a fancy way of measuring the increase in customer spending over time) since 2018.
What is CrowdStrike in simple terms?
CrowdStrike uses artificial intelligence to detect and prevent cybersecurity breaches with its Falcon platform. The platform is cloud-based and modular, so it doesn't require expensive hardware, and customers can choose which features they need. The platform gets "smarter" over time as its AI compiles and analyzes data from prior attacks. Its primary area of expertise is endpoint detection and response (EDR). Anything that connects to a network, like laptops, smartphones, and desktop computers, are endpoints. IBM reports that 90% of successful cyberattacks and most data breaches use endpoints to penetrate the network. The number of endpoints rapidly expands due to hybrid work environments, benefiting CrowdStrike long-term.
The company's customers include 70% of the Fortune 100, more than half of the Fortune 500, and the U.S. government. These are terrific customers to have because they will generally continue spending on cybersecurity even during a challenging economy. Like hair, cyber threats grow, even in a recession.
Is CrowdStrike stock a buy now?
The prolific revenue growth pushed CrowdStrike's ARR to $2.7 billion as of fiscal 2024's first quarter (ended April 30), a 42% jump over the prior year. ARR growth has been fantastic over the past several years, multiplying 3.5 times since the $600 million reported at the end of fiscal 2020. Free cash flow (FCF) is also on the rise, hitting $677 million in fiscal 2023 on a strong 30% margin. This continued in fiscal 2024's Q1 with $277 million FCF on a 33% margin. However, CrowdStrike is not consistently net profitable yet. This is true of many growth stocks and is a risk. Operating leverage is shrinking (a positive indicator), and cash flow is increasing (another plus), but this doesn't guarantee future profits.
Growth stocks are also difficult to value. Common ratios like price-to-earnings (P/E) don't work since there are no generally accepted accounting principles (GAAP) profits. Price-to-sales (P/S) is one helpful ratio. CrowdStrike trades near lows not seen since the pandemic crash and is in line with its close competitor Zscaler, as shown below.
CRWD PS Ratio data by YCharts.
CrowdStrike's management unveiled a plan to reach $5 billion in sales in three years, which it is on pace to exceed. This could cause the stock price to appreciate substantially over the long haul, making it a compelling holding. Still, growth stocks tend to be volatile, and there will be dips and spikes along the way. Accumulating shares over time or using a dollar-cost averaging system is an excellent way to scale into the stock.
