2023-04-06 09:24:03 ET
Summary
- CrowdStrike held its usual Investor Briefing on the 4th of April.
- The Briefing provided investors with further confirmation of the company’s market-leading position and strong long-term growth prospects.
- After its Q4 earnings call, CrowdStrike continued to emphasize its duel with Microsoft by providing illustrative examples and statistics, which didn’t lack criticism of its competitor.
- The company also fine-tuned its long-term target operating model by increasing expected FCF margins slightly.
Introduction and Investment thesis
CrowdStrike ( CRWD ) is the new generation, market leader in IT security with its one-stop-shop Falcon platform that “kills 99.9% of digital germs”. After several flawless quarterly results CrowdStrike disappointed investors with its FY23 Q3 results at the end November last year, which resulted in an extended period of share price underperformance. Back then around the $100 levels I called investors’ attention to the rare opportunity of acquiring the shares at a nice discount. During the month of January 2023 the share price began to recover, which was further helped by the publication of FY23 Q4 earnings at the beginning of March.
The results showed that revenue growth slowed further at the end of FY23, but backlog showed significant improvement, which provided an encouraging sign going into FY24 (For more details see my article: CrowdStrike: Can’t Stop, Won’t Stop ). As a precaution CrowdStrike sticked to its conservative (at least in my view) FY24 guidance of flat or modestly up yoy net new ARR, which should pave the way for further beats in the upcoming quarters. Analysts typically praised Q4 results and increased their respective target prices by 5-10% afterwards.
Since then, the share price hasn’t changed meaningfully, so my valuation framework I have laid out in my previous article still holds. In a nutshell it showed that by assuming rather conservative top- and bottom-line growth prospects, CrowdStrike shares would trade at a ~40% discount compared to the SaaS sector in general with FY27 operating income. This made me conclude that shares should outperform the sector over the medium term, which has been also true when comparing valuation to the general market.
Based on the above I believe it’s not a surprise that I rate the shares of the company as a Strong Buy. The publication of CrowdStrike’s Investor Briefing presentation only confirmed this view. In the following I will discuss the key takeaways from the presentation and the main changes compared to last year.
In a nutshell, the presentation confirmed CrowdStrike’s excellent long-term growth prospects, and a credible way has been laid out by the company on how to execute on this. Operating targets have been refined slightly, but CrowdStrike stayed conservative amid current macro weakness. Shares have tanked the day after the Briefing, but I believe this had rather to do with general selling pressure in the SaaS space that day rather than any negative news from the Investor Briefing.
Unmatched profitable growth at scale
Based on the company’s presentation CrowdStrike cemented its leading position in the entire SaaS space with exceeding revenues of $2 billion in the past twelve months, while still maintaining a growth rate of greater than 50% combined with an FCF margin of 30%+:
CrowdStrike 2023 Investor Briefing presentation
There was only one company who could keep up with the pace of CrowdStrike when it comes to scale and growth (I let readers guess ;), for a quick solution see my most recently published article), but when taking cash generation ability also into account CrowdStrike was the last man standing.
The perfect buy-and-hold
It’s not easy and based on the chart above it’s also quite rare that companies reaching annualized revenues of $1-2 billion are still able to grow at 40-50% a year. We could see that CrowdStrike managed this in the previous two years, but what about the upcoming ones?
As a starting point it’s worth to look at IDC’s recently published Worldwide Modern Endpoint Security report, which shows that the total market grew an impressive 27% between the July 2021 – June 2022 period. With this, the market reached a size of $8.6 billion and is expected to reach the $20 billion mark in 2026. As endpoint security builds still the core of CrowdStrike’s offering this is a good sign for future growth prospects. Within this rapidly growing market CrowdStrike managed to grow 62% yoy reaching a market share of 17.7% and defending its leading position ahead of Microsoft (MSFT):
IDC Worldwide Modern Endpoint Security report
17.7% is quite far from 100%, which provides another reason for long-term optimism. In its Investor Briefing presentation CrowdStrike goes one step further and makes a distinction between next-generation and legacy, signature-based vendors:
CrowdStrike 2023 Investor Briefing presentation
Based on this, the share of next-generation endpoint security solutions is still only a fraction of the total market, which leaves a large space dominated by legacy players waiting for disruption. It’s important to add that these groupings are based on subjective opinions. As an example, Microsoft voices on many forums that Microsoft Defender is capable of next-generation, behavior-based endpoint protection in contrast to being a legacy signature-based solution. For me, who is not a technical expert on the topic it would be hard to make a judgement on this. I understand, that based on 3 rd party reviews the solution of CrowdStrike is superior, but it’s hard to judge to what extent. If there are Readers among these lines who feel themselves comfortable in the topic, please don’t hold back your opinion and share it with other in the comment section.
Besides the core endpoint protection solution CrowdStrike has expanded its services to many other areas of IT security with time establishing itself as a true consolidator in the space. The current total addressable market ((TAM)) for all the company’s offerings makes up around $76 billion based on IDC estimates, which could more than double in 3-4 years’ time when including planned product offerings as well:
CrowdStrike 2023 Investor Briefing presentation
Compared to the company’s ~$2.5 billion annualized revenue run rate its TAM seems sufficient to support continued strong topline growth in the upcoming years.
Finally, another interesting metric that CrowdStrike shared with investors has been the evolution of its expansion opportunities within existing customers from FY22 to FY23:
CrowdStrike 2023 Investor Briefing presentation
CrowdStrike closed FY22 with an ARR of $1.7 billion. Looking only at existing customers that time there would have been another $7 billion market opportunity only from extending all modules to these customers not used by them at that time (whitespace). In FY23 ARR grew further to $2.6 billion, but this didn’t happen at the expense of the $7 billion whitespace, instead it grew further to $9.6 billion. This is another good sign that CrowdStrike is not even close to experience market saturation rather exactly the opposite.
Based on the data presented in this chapter I believe that buy-and-hold investors in CrowdStrike shares will be able to hold onto their shares comfortably for many years to come.
CrowdStrike vs Microsoft
I believe the most interesting part of the Briefing has been the part when CrowdStrike provided several direct comparisons between their security solution and that of Microsoft. This has already started in the FY23 Q4 earnings call when CrowdStrike called out more instances when its Falcon platform replaced Microsoft Defender. CrowdStrike was not shy to directly criticize the solution of Microsoft labeling it as a “low-cost, good enough promise”.
In the Investor Briefing presentation the company took this one step further and included an entire section on this topic. Let me give you a few quotes:
- “8 out of 10 times when an enterprise customer tests, they choose CrowdStrike over Microsoft.”
- “Microsoft Windows represents 95% of the compromised endpoints CrowdStrike remediates.”
- “When CrowdStrike’s IR team investigates a Microsoft customer that has been breached, 75%+ of the time Defender has been bypassed.”
From the above we can see that CrowdStrike took the head-to-head challenge with Microsoft to a next level. I am curious whether there will be a response from Microsoft anytime soon. Some main differentiating features that CrowdStrike calls out regularly are the signature-based nature of Microsoft’s solution vs CrowdStrike’s next-gen AI-based solution, the ease of deployment and maintenance of Falcon vs Defender, the lower total cost of operation of CrowdStrike’s platform, and of course the effectiveness in threat detection and prevention. CrowdStrike provided some examples for Microsoft replacements in the presentation, which supported these arguments.
The reason that CrowdStrike goes so hard after Microsoft is obvious: Looking at endpoint security market shares presented earlier we can see that Microsoft has a 16.4% share compared to CrowdStrike’s 17.7% being the closest contender. In the top of that, Microsoft managed to grow its share by 59% yoy, just shy of CrowdStrike’s 62% growth. So, Microsoft is not only a big player, but also a rapidly growing one. This makes them a real threat for CrowdStrike’s long-term growth ambitions.
Even if CrowdStrike has a seemingly more advanced product, which is not only based on their own claim, but also on the opinions of independent IT security professionals (e.g.: see TrustRadius reviews under Alternatives Considered section), it’s still not easy to compete with the Microsoft ecosystem. On the one hand, there are the several integrations with other Microsoft services that CrowdStrike can’t provide, and on the other hand, Microsoft is a tough competitor when it comes to price. CrowdStrike’s premium security solution comes also with a higher price tag that could be a possible disadvantage in times of IT budget tightening. However, I believe IT security is not the area where corporations would take the risk of opting for a lower-level service to spare some dollars.
With this, I believe the main risk factor for CrowdStrike is that Microsoft’s security solution improves meaningfully in the future providing a viable alternative for more tech savvy decision makers as well. Until then CrowdStrike should continue to disrupt the market in my opinion as it did in the past several years.
Conservative operating model updates
As it is typical for an Investor Briefing the presentation provided fresh updates on the company’s financial outlook. CrowdStrike sticked to its $5 billion+ ending ARR guidance for FY26. This would “only” require the company to generate the same amount of net new ARR in each of the upcoming 3 years it generated in FY23 ($828 million). Looking at the trend of the past few years this seems a quite conservative undertaking:
Created by author based on company data (* indicates estimates based on flat new ARR)
The company also updated its long-term target operating model, opting for a rather conservative guide as well according to my beliefs:
CrowdStrike 2023 Investor Briefing presentation
CrowdStrike managed to close FY23 with most of its previously set target ranges achieved except for its 20-22%+ operating margin guide expected to be reached in FY25. Despite achieving some previously set targets earlier than planned the company didn’t modify most of these. FCF margin was an exception to this, where the long-term goal of 30%+ has been increased to 30-32%+ after three consecutive years of reaching the 30%+ goal. I believe this could have caused some disappointment among investors who probably hoped for more.
Nonetheless, CrowdStrike doesn’t have to explain itself to investors regarding these numbers, but as the company got them used to perfection their expectations only increased in the aftermath. But this is what we love in CrowdStrike don’t we? Frowning our eyebrows on a cautious stance in the middle of global macro uncertainty forgetting about the best fundamental background within the SaaS space.
Conclusion
CrowdStrike’s Investor Briefing hasn’t been a game changer this year, but it offered an important anchor for long-term investors why to stick with the company. Guidance for the upcoming years remained conservative leaving ample room for continuous beat-and-raise. As this materializes, I believe the share price should meaningfully recover further.
The open campaign against Microsoft has been an interesting twist recently, I curiously look forward to the next chapter.
For further details see:
CrowdStrike Stock: Buy-And-Hold For The Long Term