CrowdStrike (CRWD +4.39%) was nearly the undisputed best cybersecurity investment prior to its July 19 outage incident. After that problem, CrowdStrike's position seemed a little less certain. With all the computers CrowdStrike's update crashed on, the knee-jerk reaction was to sell the stock because it was trading at a premium price point, and nobody knew what the long-term effects on its business would be.
However, investors have recently received some updates on its status, which has caused the stock to move higher. So, with new news in hand, could CrowdStrike soar to new all-time highs?
CrowdStrike's platform has multiple products
CrowdStrike's all-time high was set in early July, with shares closing at $392. That means it's off those highs by around 25%, a significant gap to close.
However, CrowdStrike could do that before too long.
CrowdStrike's cybersecurity product is deeply integrated into its clients' tech infrastructures. While its original product was endpoint protection (which protects devices that access a network), it has expanded its product line significantly. CrowdStrike's lineup now includes 28 modules, which are different functionalities that customers can add to further increase their security. These modules range from identity protection to cloud security to threat intelligence.
NASDAQ: CRWD
Key Data Points
With 65% of clients using at least five modules, CrowdStrike's solution is deeply integrated with its clients. This likely protected CrowdStrike from major turnover following the incident, as it would have been incredibly painful to switch away from CrowdStrike's Falcon platform and piece together a similar offering from multiple vendors.
The biggest issue now is future growth, but it seems to be doing just fine.
At its Fal.Con conference, CEO George Kurtz stated that following the incident, they had a 98% gross spending retention rate, which means only 2% of its revenue disappeared. Furthermore, he stated that their pipeline generation returned to pre-incident levels. Clearly, the outage had little effect on CrowdStrike's business, so it's not unreasonable for investors to think it can return to new highs.
CrowdStrike can still be a market-beating stock
One issue with CrowdStrike is that it was trading at a very high premium before the outage.
CRWD PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Thirty times sales is an incredibly lofty level, and perfection must be maintained to stay there. Even at 20 times sales, CrowdStrike can't afford another slip-up. With the stock already so expensive, you'd be forgiven if you wanted nothing to do with it.
But CrowdStrike still has a massive growth runway.
CrowdStrike's management has been clear that its goal is $10 billion in annual recurring revenue (ARR). The goal is to achieve this figure by the end of fiscal year 2029 (ending Jan. 31, 2029). Along the way, investors want to see strong profits generated as well, which is achievable now that CrowdStrike is barely breaking even from an operating margin perspective.
If CrowdStrike can grow its revenue to $10 billion by January 2029 and achieve profit margins of 25% (the best in the software industry is 30%, so this gives us some wiggle room), it would be producing profits of $2.5 billion.
Software companies also tend to have premium price tags. Adobe (ADBE +2.52%) is a great example of this, as it has traded for an average of 50 times trailing earnings since it transitioned to a software-as-a-service (SaaS) model in 2016. If CrowdStrike can trade for 40 times trailing earnings by 2029 (baking in wiggle room), the company would have a market cap of $100 billion.
From today's $70 billion valuation, that would be a compounded annual growth rate (CAGR) of 8.8% for the stock. That's nearly what the market returns on average, so CrowdStrike will have to do a bit better than my conservative estimates to beat the market over that time frame.
However, if it can repeat what Adobe did (30% profit margins, 50 times earnings), it would have a CAGR of 20%, easily clearing the 10% annual long-term return of the S&P 500 (^GSPC +0.31%).
CrowdStrike stock has the potential to soar over the next few years, but it will have to perform at a high level.
