Bill Gates sees artificial intelligence (AI) as the most revolutionary technology in decades. "The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the internet, and the mobile phone," he wrote last year. "Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it."
Gates is the co-founder and former CEO of Microsoft, so his opinion on the nascent technology is consequential. Assuming Gates is correct, AI represents a once-in-a-generation opportunity for investors. Ultimately, the best way to capitalize on that opportunity is to buy and hold a basket of AI stocks.
Here's why CrowdStrike Holdings (CRWD +0.01%) belongs in that basket.
NASDAQ: CRWD
Key Data Points
CrowdStrike brings superior artificial intelligence to endpoint security software
CrowdStrike is a cybersecurity software vendor. Its platform integrates more than two dozen modules that address multiple security end markets. That strategy reduces complexity for customers by supporting vendor consolidation. In other words, CrowdStrike's cohesive solution unifies security workflows on a single platform, which is more efficient than relying on point products from different vendors.
That value proposition is compelling for three reasons. First, CEO George Kurtz says most enterprises still buy more than 60 security point products. Second, CrowdStrike is a recognized leader in several software markets, including endpoint security, cloud workload security, and threat intelligence services. Third, its platform incorporates superior artificial intelligence (AI) that drives better threat protection.
CrowdStrike added various AI capabilities to its software over time, such as malware classification and threat analysis. It recently became the first vendor to introduce AI-powered indicators of attack (IoAs), a proactive detection technique focused on adversary behavior. IoAs can identify novel threats in real time, whereas relying on traditional indicators of compromise is a reactive strategy that cannot detect unknown threats.
CrowdStrike has an important advantage where AI is concerned. The company has unique data due to its leadership in multiple markets, especially threat intelligence. That data advantage lays the foundation for superior AI. A report from Frost & Sullivan states: "CrowdStrike leads the industry with regards to the application of artificial intelligence/machine learning to endpoint security." The analysts also opine that CrowdStrike offers unparalleled prevention of malware and malware-free attacks.
Building on that, Morgan Stanley sees CrowdStrike as one of the software companies best positioned to monetize generative AI. That's a nod to the generative AI assistant (Charlotte AI) CrowdStrike debuted last year. Charlotte AI is a natural language interface that automates tasks related to threat detection, investigation, and remediation. The product is currently in private preview, but management estimates its addressable market at $7 billion (out of a total addressable market of $225 billion) by 2028.
CrowdStrike has powerful tailwinds behind its business
CrowdStrike should benefit from several tailwinds in the future. First, cyberattacks are becoming more common, more sophisticated, and more costly. The annual cost of cybercrime is expected to double in four years to hit $23 trillion by 2027, fueled by cloud migration and the proliferation of connected devices and systems. CrowdStrike should be top of mind for many organizations given its reputation.
Second, most organizations are woefully unprepared to navigate the threat landscape. Nearly 50% of companies still use traditional antivirus products, which fail to detect 39% of malicious software, according to CrowdStrike. In addition, global demand for cybersecurity workers exceeds supply by 3.4 million. Organizations can close that skills gap by outsourcing security operations, and CrowdStrike is the market leader in managed detection and response.
Third, the Securities and Exchange Commission (SEC) recently adopted new rules that require public companies to disclose "material cybersecurity incidents" within four business days. No company wants that type of publicity. A security breach can tarnish a company's brand image, and that damage can have lasting effects. So the SEC's new reporting requirements give companies one more reason to implement effective cybersecurity.
CrowdStrike stock is worth buying despite the rich valuation
Grand View Research expects the cybersecurity market to increase at 12% annually through 2030, but CrowdStrike should grow much faster given its strong competitive position. Indeed, it placed no. 3 on the 2023 Fortune Future 50 list, an annual ranking of the world's largest companies based on long-term growth prospects.
Wall Street expects CrowdStrike to grow sales at 30% annually over the next five years. That consensus estimate makes its current valuation of 27.8 times sales seem tolerable. To be crystal clear, that multiple is not even close to cheap, but CrowdStrike has a strong competitive position in a quickly growing industry. I think that will translate into market-beating returns for patient shareholders over the next five-plus years.
