Shares of cloud-native cybersecurity specialist CrowdStrike (CRWD 1.68%) surged by nearly 60% so far this year. Despite this, the stock remains 42% below its all-time high share price of $293.18, which it reached in in November 2021.

CrowdStrike is mainly focused on securing endpoints (smartphones, tablets, servers) that are considered to be vulnerable access points for over 90% of cyberattacks and nearly 70% of successful data breaches. The company reported revenue and earnings that were ahead of both Wall Street predictions and its own guidance in the second quarter of fiscal 2024 (ending July 31, 2023). As a result, there's a good chance the stock will go much higher in the coming months.

Second-quarter performance

In the second quarter, CrowdStrike's revenue rose by 37% year over year, reaching $731.6 million, while non-GAAP earnings skyrocketed by 109% year over year to $180 million. The company generated cash flow from operations of $245 million and free cash flow of $189 million.

CrowdStrike posted a healthy dollar-based net retention rate -- (annual recurring revenue earned from subscription customers in the second quarter of fiscal 2024 as a percentage of that earned from the same customers in the same quarter of the prior fiscal year) -- at the benchmark level of 120%, highlighting the success of the company's cross-selling and upselling strategy to existing clients. This is also obvious because the percentage of customers subscribing to five or more Falcon modules has jumped year over year by 4 percentage points to 63%.

Untapped market potential

CrowdStrike estimates that its total addressable market (TAM) in 2023 is valued at $76 billion. Hence, based on its trailing 12-month revenue, the company has tapped only around 3.4% of this potential. It expects its TAM to grow to $97.8 billion by 2025. This expansion in market opportunity can help propel its top and bottom lines in the coming quarters.

Strength in artificial intelligence (AI)

The artificial intelligence (AI) market for cybersecurity is estimated to grow from $19.2 billion in 2022 to $154.8 billion in 2032. CrowdStrike is primed to harness this trend, thanks to the deep integration of AI in its offerings and focus on developing new AI-driven cybersecurity products and services.

For several years, CrowdStrike's Falcon platform has been using machine learning and artificial intelligence algorithms to predict, detect, and defend network endpoints, cloud workloads, identity, and other data from cyber threats. The company introduced AI-powered indicators of attack (IOA) models that use AI and machine learning to predict threat patterns and active breaching attempts and proactively counter them.

Finally, it developed a generative AI-powered module, the Charlotte AI platform, which will help accelerate threat detection and responses, regardless of the expertise level of the Falcon users.

Improving profitability and network effect

In the past few quarters, CrowdStrike noted a significant decline in its year-over-year revenue growth rates. While the company's second-quarter year-over-year revenue growth rate of 37% seems quite healthy, it pales significantly in front of the nearly 70% revenue growth rate posted two years ago.

Despite a revenue slowdown, CrowdStrike's margins seem to be improving steadily -- thanks to the company's focus on controlling costs. In the second quarter, it was GAAP profitable for two consecutive quarters.

CrowdStrike also benefits significantly from network effects. The company collects huge amounts of threat data (over 2 trillion data points daily) from its large customer base of more than 23,000 businesses. The data is used to train the company's AI-powered Falcon platform, which is becoming smarter in preventing cyberattacks. This helps attract even more clients to the company's platform.

Impressive guidance for fiscal 2024

CrowdStrike is guiding for non-GAAP net income for fiscal 2024 to be between $680.4 million and $689.7 million, a considerable hike from its previous estimate of $562.8 million to $590.1 million. It's also guiding for fiscal 2024 revenue in the range of $3.03 billion to $3.04 billion, again higher than the previous estimate of $3 billion to $3.03 billion. This is indicative of the company's confidence in its deal pipeline and implementation capabilities, even in the current tough macroeconomic environment.

Analyst recommendations and valuation

Wall Street seems to be highly optimistic about CrowdStrike, with 35 of the 46 analysts tracking the company giving it their highest buy rating. The average price target of $184.9 is 8.3% higher than the company's current share price (as of Sept. 15, 2023), while the highest and lowest target prices estimated by analysts are $250 and $150, respectively.

CrowdStrike is currently trading at 15.5x trailing 12-month sales, significantly higher than the median software industry valuation of 2.3. The premium valuation seems justified, given the resilience of the company's Falcon platform (even in a tough macroeconomic environment), improving margins, network effect, and strong guidance for fiscal 2024. Considering that the company's valuation is currently hovering close to its historical lows, it makes sense to buy a small position in this fundamentally strong stock.