For the past decade or so, growth stocks (particularly in tech) have been the hype of the stock market. It's understandable why, though: They get a lot of media attention, stock prices can soar quickly, and they're generally viewed as "cooler" companies than those in a sector like industrials.
However, with the glitz and glam surrounding growth stocks comes just as much downside. Many have rallied this year, but most are nowhere close to their 2020 or 2021 peaks. While cybersecurity company CrowdStrike (CRWD 2.03%) fits that description, it remains a great long-term growth option. Here's why.
CrowdStrike has a leg up in the AI race
CrowdStrike is a leader in cloud-based endpoint security. Endpoints are physical devices that connect to a network, such as laptops, desktops, mobile phones, tablets, and servers. Although AI has recently dominated talks surrounding tech, CrowdStrike is not new to it. It essentially pioneered pure-AI solutions in cybersecurity with its 2011 Falcon Platform.
Having over a decade of AI experience (and the data to go with it) should be a long-term competitive advantage for CrowdStrike. The more data you have to train AI platforms, the more effective they should ideally become, and I'm sure CrowdStrike is sitting on much more relevant data than many of its competitors who recently started incorporating AI solutions into their platforms.
Source: CrowdStrike investor presentation, May 2023.
Sustainable good financial performance
Despite broader economic conditions, CrowdStrike's financials are still headed in the right direction. In its Q1 fiscal year 2024 (ended April 30), revenue, subscription revenue, and annual recurring revenue (ARR) all increased 42% year over year.
Since CrowdStrike is a subscription-based business, it's important to focus on ARR growth because it gives better insight into its ability to have sustainable revenue long term. CrowdStrike's ARR is currently $2.73 billion, with the goal being to hit $5 billion by 2026.
Its ARR has had a compound annual growth rate (CAGR) of 79% over the past five years, so even accomplishing half of that would easily lead it to its goal.
Data by YCharts
Operating in an industry that's becoming indispensable
As the world becomes more digital dominant, the need for cybersecurity has transitioned from an "it'll be nice to have this" expense to a "this isn't optional" expense. It's essentially insurance for companies operating online, protecting them from much costlier cyberattacks. In fact, some companies never recover from cyberattacks.
The cost of cyberattacks, even for small businesses, is routinely in the seven-figure range. According to IBM, the average cost of a data breach in the U.S. in 2006 was $3.6 million. As of 2022, that cost had jumped to $9.44 million (the global average is $4.35 million).
Arguably more impactful than the financial hit is the reputational damage it can do to a company. Trust takes a while to build, but can be broken with one mishap. It's not a risk most companies can afford to take.
McKinsey says cybersecurity has a $1.5 trillion to $2 trillion total addressable market, and only around $150 billion is currently penetrated. That doesn't mean the industry will reach that mark anytime soon, but it shows the pie is destined to get bigger, and CrowdStrike is positioned to grab up market share as it does.
The developing ecosystem is good for longevity
CrowdStrike has done a great job attracting initial customers and locking them into its ecosystem of solutions (called modules). Around 23% of its customers use seven or more modules, 40% use six or more, and 62% use five or more. Add in its 125% in dollar-based retention for subscription ARR (meaning customers are spending more each year), and that's a recipe for longevity.
There are still tons of growth opportunities left for CrowdStrike, and the company has the resources to make sure it continues on the right path.
