In the years since it went public, cloud-based cybersecurity specialist CrowdStrike (CRWD 2.03%) has been a market-beating investment for shareholders. Although the stock now trades 41% lower than its late-2021 high, it's still outpacing the S&P 500 handily since its 2019 IPO.
Much of the stock's performance has mirrored the growth of the business. CrowdStrike has consistently posted impressive revenue growth and cash generation. That said, some of its lofty growth metrics slowed over the last several quarters.
Is this slowing growth of the stock and the company a red flag, or simply the type of ebb and flow that any business goes through?
Revenue growth has always been slowing
CrowdStrike maintains a cybersecurity platform that uses artificial intelligence (AI) to detect and stop security breaches for its clients before they happen and automatically protects the entire network of its customers whenever a threat is detected anywhere. The company is entirely recession-proof, but it's likely that cybersecurity would be the last expense to be cut from a budget, considering its importance.
One interesting fact about CrowdStrike is that its revenue has increased every quarter since its IPO, but its revenue growth rate has been declining steadily as well. In its first reported quarter as a public company, its fiscal Q1 2020 (ended April 30, 2019), CrowdStrike posted year-over-year revenue growth of 103%. In its most recently reported quarter, Q2 2024 (which ended July 31), that metric was 37%. With the exception of a few quarters here and there, its quarterly growth rate has trended down and to the left.
CRWD Revenue (Quarterly) data by YCharts.
Consistently slowing revenue growth over its history as a public company doesn't sound great, but it doesn't tell the whole story. For one thing, 94% revenue growth isn't sustainable for any company. Secondly, 37% growth is still very good. There's also the simple fact that growing the top line at high rates gets harder as a company gets larger.
Customer retention and expansion
Revenue only tells part of the story for CrowdStrike. One of its strengths as a business is its ability to keep its customers and get them to spend more with it over time. This is vitally important in an industry with many quality businesses to compete against. If CrowdStrike can prove to be sticky with high switching costs, that's a competitive advantage.
The data suggests this strategy is working. CrowdStrike sets a benchmark for itself of a 120% dollar-based retention rate (DBNRR). Essentially, this means it expects its established customers to be spending 20% more each year on average than they did in the previous year. Since its IPO, its DBNRR has never fallen below that level. In fact, in the most recent quarter, it was 125%.
Another way to see how its land-and-expand strategy is playing out is by watching how many customers purchase additional CrowdStrike products, which the company calls modules. In Q1 2020, 55% of its customers paid for four or more modules, and 35% paid for five or more. Such a large fraction of its customers now use four or more modules that the company no longer reports that metric. The share of customers paying for five or more modules now stands at 63%, while 41% pay for six or more, and 24% pay for seven or more.
Reaching profitability
Like many growth companies, CrowdStrike has prioritized growth over profitability for most of its history. However, recently that has started to change. When money was cheap due to low interest rates, many companies remained unprofitable and didn't seem in a hurry to change that. This made it harder to gauge which companies were unprofitable by choice and which simply didn't have the ability to turn a profit.
CrowdStrike is showing it's in the latter camp. In the most recent quarter, the company posted a net income of $8.5 million, compared to a net loss of $49 million in the prior year's Q2. It remains to be seen if this trend can continue, but it has been heading in this direction for a while, so it seems plausible. CrowdStrike's bottom line has been trending upward since fiscal Q1 of 2022 (ended April 2021), when its net loss was $85 million.
The slow march toward profitability has been aided by revenue and customer growth, but also by steadily improving operating results. In its fiscal 2018, CrowdStrike's operating expenses exceeded its revenue. Operating margin turned positive in fiscal 2021 at 7% and has reached 19% through the first half of fiscal 2024.
The bottom line for investors
The cybersecurity market is vast and growing. CrowdStrike estimates its total addressable market to be approximately $76 billion right now, and believes it could potentially grow to $158 billion by 2026. These estimates might be on the high side, but they are likely directionally correct. CrowdStrike won't be the only winner in this space, but its results demonstrate it is likely to be a major player.
Considering its business performance and the market opportunity, there's no reason to be scared off by the slowing revenue growth, especially considering the company's ability to improve the bottom line at the same time.
