The S&P 500 (^GSPC 1.02%) has reversed course and ripped 18% higher this year as investor sentiment has improved in response to signals of economic resilience and enthusiasm surrounding artificial intelligence (AI). That leaves the index just 5% from a record high, meaning stocks have nearly clawed their way back to bull market territory.
Looking ahead, AI will almost certainly be a defining trend of the next bull market. Several Wall Street strategists have cited AI for recent upward revisions in their S&P 500 price targets, and Ark Invest says AI software revenue will increase at 42% annually to reach $14 trillion by 2030.
Cybersecurity company CrowdStrike (CRWD 2.03%) is sure to benefit from that trend. Here's what investors should know.
Cybercrime is an expensive problem
Digital transformation is driving the proliferation of connected devices and corporate software systems across private data centers and public clouds, creating new attack surfaces for hackers. But cybercriminals are also becoming more sophisticated in their attack techniques as they evolve away from traditional malware, relying instead of difficult-to-detect malware-free attacks such as abusing valid credentials.
The problem is made more serious by industrywide labor shortages. The global cybersecurity workforce increased 11% to 4.7 million people last year, but the number of unfilled positions increased 26% to 3.4 million. That means many organizations lack the skills needed to adequately protect their sensitive data and devices, and demand for skilled workers is outstripping supply.
In total, the cost of cybercrime is expected to increase at 12% annually to reach $13.8 trillion by 2028, according to Statista. Suffice to say cybercrime is a serious problem, and that tailwind should translate into strong demand for cybersecurity software in the years ahead.
CrowdStrike is a leader in cybersecurity software
CrowdStrike was one of the first companies to apply artificial intelligence (AI) to cybersecurity, and management says its unmatched ability crowdsource data makes its AI engine uniquely effective in identifying threats. Consultancy Frost & Sullivan came to a similar conclusion in a recent report: "CrowdStrike leads the industry with regards to the application of artificial intelligence/machine learning to endpoint security, as well as providing unparalleled prevention of malware and malware-free attacks."
But superior AI is just one of the many innovations CrowdStrike has brought to cybersecurity. It also invented a new approach for stopping breaches known as indicators of attack (IoAs), a technique that analyzes behavioral patterns to proactively identify threats, rather than relying on reactive indicators of comprise like other vendors. The combination of superior AI and IoA-based detection allows CrowdStrike to prevent sophisticated malware-free attacks and zero-day exploits (i.e., never-before-seen attacks) that legacy solutions cannot detect.
Not surprisingly, CrowdStrike has received a great many commendations from industry experts, spotlighting the breadth and utility of its cybersecurity platform. Forrester Research, Gartner, and the IDC have recognized the company as a leader in managed detection and response, and endpoint security. Similarly, Frost & Sullivan has recognized its leadership in threat intelligence and cloud-native application protection.
CrowdStrike is one of the fastest-growing software companies
CrowdStrike crossed $2 billion in annual revenue last year, becoming the second fastest software company in history to reach that milestone. Some of that momentum has dissipated amid the challenging economic environment, but CrowdStrike still reported solid financial results in the first quarter. Revenue increased 42% to $693 million, and non-GAAP net income soared 84% to $0.57 per diluted share.
Investors have good reason to believe CrowdStrike can maintain or even extend its market presence in the years ahead. The company has a material advantage in its knack for innovation, a quality that allows it to promptly address new threats as they appear across the ever-evolving cybersecurity landscape.
CrowdStrike has introduced a slate of new products in the last year alone. Falcon Surface is an external attack surface management module that helps businesses close security gaps across their IT ecosystems. Charlotte AI is a digital assistant that leans on generative AI to answer cybersecurity questions posed in natural language. And Falcon Complete XDR is a fully managed extended detection and response service that allows clients to outsource attack surface monitoring and threat remediation to third-party security experts, helping them cope with the cybersecurity labor shortage.
Currently, CrowdStrike estimates its addressable market at $76 billion, but management says its product pipeline could push that figure to $158 billion by 2026. Yet shares currently trade at 14.5 times sales, not a cheap valuation, but still a bargain compared to the three-year average of 33.7 times sales. With that in mind, risk-tolerant investors should buy a small position in this AI growth stock right now.
