MSFT - CrowdStrike Remains Reasonably Priced Despite A High Top Line Valuation

Summary

• Industry tailwinds should help justify CrowdStrike's valuation.
• CrowdStrike remains the leader in the endpoint security space.
• Long-term valuations aren't absurd.

CrowdStrike's (CRWD) stock is down significantly from its recent highs. Despite being a leader in the endpoint security market, and with limited competitors, mainly Sentinel One, among a few others, including Windows Defender, and Cylance, the stock is down significantly, potentially providing an entry point for investors.

Endpoint security is expected to grow on the back of a number of key trends, and Gartner has projected that 95% of the endpoint security market will eventually be cloud-based by the end of 2023, making CrowdStrike's Falcon a key competitor in the space. This makes CrowdStrike among the most preferred endpoint security systems currently, with the Falcon endpoint security system being the highest-rated system among the various choices. The high degree of growth and potential for profitability has kept the high valuations intact despite the fact that CrowdStrike also offers a whole host of security solutions for the Cloud, and considering the Cloud industry is expected to grow significantly over the next decade, this offers CrowdStrike a significant opportunity.

CrowdStrike Investment Thesis

CrowdStrike continues to dominate the endpoint security market, driven by strong pricing, after-sales service, and a product that is competitive, combined with the increasing need for endpoint security around the world. CrowdStrike remains the premier go-to choice among endpoint security candidates, which makes it ideal for long-term investing. The stock remains expensive at 10x sales, but is manageable nonetheless.

Market share continues to be favorable towards CrowdStrike

The Falcon security service, which provides complete endpoint security services, is increasingly becoming popular, and the service currently ranks at the top of the worldwide endpoint security market, according to IDC's market share report.

"The recognition from IDC reinforces CrowdStrike as the market leader in endpoint security, outpacing 26 vendors in the report that range from pure-play security vendors to software vendors like Microsoft," said Michael Sentonas, president at CrowdStrike. "More than 21,000 customers rely on CrowdStrike for our industry-leading solutions. Customers are leveraging the CrowdStrike Falcon platform to consolidate their security stack and save on operational costs."

This means that CrowdStrike will likely continue to not only retain market share, but may gain market share as well.

What's driving the market dynamics?

The current nature of the industry, as competitive as it is, is forcing consolidation among the major vendors. The consolidation is being led by a number of factors, including the need for a better-integrated setup, as a number of clients increasingly deploy on multiple backends and have multiple end sources to deal with. This essentially makes the endpoint security market a race between a few firms. IoT and Mobile Gaming continue to be the biggest factors, but, further adding to the CrowdStrike dynamic is the fact that many workers are now remote. The combination of these factors needs a program that can cater to the dynamic needs of companies. Furthermore, a number of companies need protection against threats against ransomware, which itself has become a massive industry and is expected to grow by around 16% in the next few years. That number may only increase if there is a recession.

This is where Falcon has been able to shine over its competitors, who have been increasingly limited in their setup. For example, Cylance continues to lag behind Falcon in terms of offerings and after-sales service . This has led to an increasing number of clients choosing the security provide over competitors.

CrowdStrike when compared to competitors

CrowdStrike's main feature is the preference of users over competitors. There are currently the following competitors, Carbon Black, Cylance, McAfee, Windows Defender, Sentinel One, and, Symantec who make up the core of the competition.

Carbon Black offers similar endpoint satisfaction when compared to CrowdStrike, but remains slightly more expensive than CrowdStrike. The integrated approach to endpoint security, combined with pricing, remains the key to CrowdStrike's success. It also clearly offers better enterprise-grade security to competitors, which as more generic software vendors such as Microsoft.

Their complete package combined with the increasing need for endpoint security has made the likelihood of that the current high valuation may indeed continue to be justifiable.

CEO- "There are many positive trends we see in our business, including strong competitive win rates, consistent ASPs, exceptional retention rates is expected, and the mission-critical nature of cybersecurity."

CrowdStrike continues to emphasize its retention rates, and management has been increasingly focusing on the SMB space, which it believes will be key to future growth. CrowdStrike has been also facing numerous headwinds, but that is a more generic problem stemming from the fact that CrowdStrike is dependent on larger outlays, but these remain temporary headwinds.

Looking at margins to see where valuations might head

The current gross margins stand at 73%, and going forward they are likely to be in the range of 70-75%, which makes it likely that in the future should CrowdStrike invest industry-standard level of spending in their business, they are likely to see future margins of around 20-25%. The current operating costs are standing at around 75-79% of revenue, depending on the quarter. This high level of spend stems from CrowdStrike's continued investments in its R&D and secondly its high marketing spend, as it looks to permanently get ahead of competitors. Eventually, those numbers will have to come down after the industry becomes more mature. Usually, software companies, with 70% plus gross margins, are able to achieve around 20-25% margins, and that's where I expect CrowdStrike to end up eventually.

The future of the business

Considering the market size is expected to be around $23-$24 billion USD by 2026, and the total cybersecurity and the total cybersecurity market is expected to grow at 12% from 2023, until 2030 and with the current market size of around $202 billion, leaves plenty of opportunity for CrowdStrike to continue their strong run.

Therefore, the current price to sales for the company, which hovers around 10x price, (which is expensive by historical standards no doubt), may not be expensive overall, considering the run rate. And furthermore, by the end of 2023 the company could grow by another 40-50%, which would mean that if we assumed normal margins, without the temporary spending of around 20%, that would put the forward P/E of around 43, which is not excessive. The stock is currently down around 52%, from its 52-week high, and investors could start looking at a long-term position.

Of course, as we move into a tighter monetary environment, the realities of spending on technology will continue to affect ARR, luckily CrowdStrike continues to have a strong gross retention rate of 97%, which should help it weather any coming economic downturn. Cybersecurity remains paramount with increased malware, and ransomware threats. CrowdStrike, therefore, remains one of the few tech firms that may have value.

In conclusion, CrowdStrike remains one of the few stocks despite loft valuations that has a future that is word considering, and investors will likely look favorably at the risk-reward scenario, especially if the coming quarters are stronger than the market expects.

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