With its share price rising by 190% over the last year, CrowdStrike (CRWD 2.03%) may have investors feeling like they've already missed their opportunity to buy. However, with the cybersecurity juggernaut expected to grow sales by 39% over the next year, growth remains abundant -- and there is no obvious sign of a significant slowdown ahead.
Buoyed by clear megatrends in the cybersecurity industry that could last for decades and beyond (the global cost of cybercrime is expected to double by 2028), the company deserves consideration from long-term investors. Sporting a market capitalization of $68 billion, CrowdStrike would need annualized returns of 18% to reach the $1 trillion club by 2040.
While that figure would outpace the S&P 500 index's average total return of 12% annually, here's why CrowdStrike looks like a strong contender to reach the $1 trillion mark with enough time.
CrowdStrike's immense growth optionality is hard to fully comprehend
Sifting through trillions of data points every week, CrowdStrike's single-agent, cloud-based cybersecurity platform grows more robust for each additional customer that joins its platform. Quickly expanding its solutions from focusing primarily on endpoint protection (think laptops, printers, and servers) to becoming a complete security platform, CrowdStrike has grown from three security modules in 2016 to 27 today.
Each module provides a unique security solution and can be added by customers to fit their specific needs -- all by relying upon just one agent, CrowdStrike's Falcon platform. The average number of agents on an endpoint today is 13 or more, so CrowdStrike's platform offers much-needed vendor consolidation for businesses looking to simplify their operations.
CrowdStrike is gradually becoming a one-stop shop for businesses' cybersecurity needs. Its growth potential and optionality seem almost boundless as it releases new modules tailor-made for its customers' desires. Look no further than three of its recent module advancements, each highlighting the company's ongoing shift toward becoming a complete security platform:
- Falcon ID: CrowdStrike's identity protection and detection modules could become the company's next massive growth outlet. With 80% of global attacks stemming from exploited IDs, sales for these solutions grew from $7 million in annual recurring revenue (ARR) in Q3 of 2021 to over $200 million in Q2 of 2024.
- Falcon Cloud: Bolstered by its recent acquisition of Bionic, which focuses on identifying and protecting items in the cloud, CrowdStrike now offers a complete cloud security solution. Growing its ARR from $106 million in Q4 of 2022 to nearly $300 million today, this cloud unit operates in a market expected to be worth over $32 billion by 2028.
- Falcon LogScale: Also strengthened by a recent acquisition of Humio, CrowdStrike's security information and event management (SIEM) operations gather data across its clients' entire IT infrastructure and put this treasure trove of information in a centralized security hub. Allowing for real-time search and query, LogScale could act as the foundation upon which CrowdStrike builds its generative AI ambitions (Charlotte AI) -- enabling security analysts of all skill levels to make more informed decisions.
Summarizing the immense growth optionality provided by these quickly growing areas, CEO and Founder George Kurtz said, "Our cloud identity and LogScale next-gen SIEM products are examples of IPO-worthy hypergrowth businesses."
Crowdstrike also landed an eight-figure deal from the federal government in its latest quarter. It counts less than 1% of the public sector as customers, so deals like this could pave the road toward it becoming a trusted source among government departments over time.
Ballooning margins, but a valuation to match it
Thanks partly to its land-and-expand business model, CrowdStrike sees increasing profit margins for each additional module it sells to existing clients and each new customer it adds. This can be seen in the company's net income margin since its initial public offering.
CRWD Profit Margin (Quarterly) data by YCharts
Now with three consecutive quarters of generally accepted accounting principles (GAAP) profitability, the company could be eligible for the S&P 500 index with one more quarter of profits. While this feat in and of itself is not a good reason to buy a stock, it is a nice perk for investors, as it could spur additional buying from institutions needing to add the company to their S&P 500 tracking funds.
However, despite the clear megatrends working in CrowdStrike's favor, the company's incredible growth optionality potential, and steadily improving margins, its valuation is tough to stomach at 24 times sales.
CRWD PS Ratio data by YCharts
To put this price-to-sales ratio in perspective, consider that even if CrowdStrike's net profit margin was 20% instead of its current 3% mark, it would still be trading at 120 times earnings. Simply put, investors would need the company to deliver 20% or higher growth for a decade or more (with margins continuing to improve) to pay off.
Due to this contrast between its extreme valuation and unstoppable-looking operations, CrowdStrike is a perfect dollar-cost averaging opportunity for investors. Gradually accumulating shares over an extended period, investors can join CrowdStrike on its journey to $1 trillion at various price points, removing some of the premium valuation risks.
