CrowdStrike (CRWD +8.09%) has been one of the market's best-performing cybersecurity stocks over the past year, rising around 164%. But to have that kind of performance, a stock had better be able to back it up with results.
CrowdStrike's latest announcement solidified its place on top of the cybersecurity mountain. This makes CrowdStrike the first stock any investor should consider if interested in the cybersecurity industry.
CrowdStrike's market is massive
With business and society becoming more digitally focused every day, cybersecurity products have never been more essential. One essential way to keep threats at bay is to deny access to internal systems. CrowdStrike's base product prevents intruders from gaining access to these systems by analyzing trillions of data points to determine what is a threat and what is normal activity. If it detects a threat, it can immediately shut down that endpoint's access.
While that product is the base use for CrowdStrike's platform, it's quickly becoming a choice for many cybersecurity needs. CrowdStrike has products in identity protection, cloud workload protection, and threat intelligence, making CrowdStrike a go-to place if clients want to consolidate cybersecurity providers. Altogether, CrowdStrike estimates its 2024 total addressable market is $100 billion, which will expand to $225 billion by 2028.
NASDAQ: CRWD
Key Data Points
Still, CrowdStrike knows it can't capture every bit of revenue in this space, and its goal for the next five to seven years is to reach $10 billion in annual recurring revenue (ARR). Considering its ARR was $3.44 billion at the end of the fourth quarter of fiscal 2024 (ended Jan. 31), that's an aggressive goal for CrowdStrike.
CrowdStrike is also seeing strong demand for the next year, as management gave guidance for about $3.96 billion in revenue, indicating about 29% revenue growth for the next year. This outlook flies in the face of what competitor Palo Alto Networks said in its latest conference call, as its CEO stated that the company is noticing that customers are experiencing "spending fatigue."
But that just shows how strong of a product line CrowdStrike has, as it's continuing to excel as others waver. Its strong product line and incredible growth combine to make it the best cybersecurity stock on the market, but should investors buy now?
The stock is quite expensive
CrowdStrike is just starting its journey to achieve maximum profitability, as it became sustainably profitable for the first time in fiscal 2024. But, its profit level isn't nearly enough to value the company, so we'll need to use its price-to-sales ratio to understand how expensive the company is.
At 28 times sales, there's no doubt CrowdStrike is an expensive stock.
CRWD PS Ratio data by YCharts
It trades much higher than its software peers, including The Trade Desk at 21 times sales and Snowflake at 20 times sales. That's a bit of a warning flag for me, but today's price tag may be worth it if its long-term growth projections pan out.
CrowdStrike set the goal of having $10 billion in ARR in five to seven years, so if it achieves that mark by 2029, the stock would be valued at 7.9 times sales if it didn't change in value from now until then. By that time, CrowdStrike will probably be producing strong profit.
Let's use Adobe, a fully profitable software company, as a benchmark. If CrowdStrike could achieve a 30% profit margin with $10 billion in revenue, it would produce annual profit of $3 billion. That would value CrowdStrike at 26 times 2029 earnings at today's stock price. Adobe's five-year average price-to-earnings ratio is 48, so if it were to match Adobe's valuation and profitability level, CrowdStrike would have an 82% upside by 2029.
So CrowdStrike is still worth buying if it can hit its revenue targets. But if it wavers, expect the stock to get hit, as sky-high expectations are baked into the stock price.
