In the realm of artificial intelligence (AI) investing, there are multiple ways to invest. However, my favorite way to capitalize on the AI trend is through application companies that utilize various aspects of AI in their product offerings to solve problems in many industries. Another key shift across the business world is realizing that most companies' cybersecurity defenses are inadequate.
CrowdStrike (CRWD +0.05%) lies at the crossroads of these two important industries and is a stock I've already bought more of in October. As one of the best growth stocks in the market, I believe CrowdStrike deserves a position in every growth investor's portfolio.
CrowdStrike's products are leaders in their respective fields
CrowdStrike's products focus on network endpoints, devices that access a company's network like a phone or laptop. These are among the easiest ways for hackers to access a company's network, but manually detecting these breaches is difficult. CrowdStrike's Falcon platform can automatically identify these breaches and stop them before they do significant damage.
It does this by utilizing a segment of AI known as machine learning. By analyzing trillions of signals weekly, CrowdStrike's platform knows what is normal activity and what is a threat. This was a key innovation when CrowdStrike first came on the scene, but now multiple competitors offer the same product.
However, CrowdStrike consistently ranks as a leader in the Gartner Magic Quadrant ranking system, giving it further credence when onboarding clients.
NASDAQ: CRWD
Key Data Points
In addition to endpoint security, CrowdStrike also has more than 20 ancillary offerings that improve overall protection and give IT teams more tools to tailor the platform to their specific business needs. With more than 63% of clients utilizing at least five CrowdStrike products, it's evident that clients are seeing a benefit to deploying CrowdStrike's products throughout the business.
It also has products that can specifically capitalize on the AI trend. AI workloads are massive and usually have to operate on the cloud. This can expose the data stream or pool to attacks, but CrowdStrike's cloud workload protection product can provide the same protection as it does to a laptop.
CrowdStrike's wide product offering combined with the high quality of its products has also turned the stock into one of the best growth stocks, as its financials have been impressive in 2023, even as other software companies struggled.
CrowdStrike is benefiting from an unexpected line item
In the second quarter of fiscal year 2024 (ending July 31), CrowdStrike's annual recurring revenue increased by 37% to $2.93 billion. Although that's slower than the 59% growth CrowdStrike put up during last year's Q2, it's still a rapid pace from a fairly sizable software company.
CrowdStrike is also inching toward full profitability. Although it posted an $8.5 million net profit, it actually posted an operating loss of $15 million (which was down from $48 million a year ago). The line item that pushed CrowdStrike over the edge of profitability was its interest income of $37 million. Because CrowdStrike is a cash-generating machine (it produced free cash flow of $189 million in Q2), it amassed a significant cash position of $3.1 billion. Thanks to high interest rates, it can generate a sizable revenue stream from this holding, which helped it turn a profit.
The key metric to watch is its operating margin, as a profit here will signal that CrowdStrike doesn't need high interest rates to maintain profitability. But with continuous improvements, CrowdStrike is drawing closer to the elusive profitability mark.
CRWD Operating Margin (Quarterly) data by YCharts
With CrowdStrike's success and its massive market opportunity, it's no surprise that the stock trades at a premium valuation level. At 65 times forward earnings and 17 times sales, few investors would consider this stock cheap at face value. But growth investors are usually more focused on the long-term opportunity that a company is pursuing.
With CrowdStrike operating in what it believes is a $76 billion market opportunity (expected to grow to $158 billion by 2026), it has a massive growth runway. As a result, I think CrowdStrike's stock is still a buy here despite its premium price tag.
Both AI and cybersecurity are massive investment themes. By buying CrowdStrike stock, you can take advantage of both through one investment.
