2023-03-05 17:00:00 ET
Summary
- CrowdStrike stock is down 50% from its 52-week high, yet the company is rolling.
- After taking a fresh look, the long-term bullish case is compelling.
- Was I right to add to my position? Let's take a look.
Cybersecurity is top of mind for executives. When it comes to breaches, an ounce of prevention is definitely worth a pound of cure. Endpoint protection is vital with the proliferation of remote workforces, and cloud security has never been more critical. This is why the cybersecurity industry should be resistant to cost-cutting.
The market has taken CrowdStrike ( CRWD ) investors on a wild ride over the last few years. From pandemic despair to growth stock jubilation and back to (dare I say) some sense of normality.
If you're going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it.
-Charlie Munger
Of course, it's easy for him to say. The rest of us don't land on billion-dollar cushions. Still, it helps to look at the history of uber-successful long-term investments that have gone through periods of significant decline. I examine specific cases in detail here . Even companies like Visa ( V ), Apple ( AAPL ), Microsoft ( MSFT ), Amazon ( AMZN ), and many, many others experienced steep short-term declines and still created immense wealth.
CrowdStrike stock is only appropriate for some investors. Growth stocks are volatile and hard to value, making them riskier than mature companies.
I recently added substantially to my position as the stock price flirted with $100 per share.
Here's why.
Industry leader with expanding market share
The cybersecurity market is fragmented, with several companies jockeying for supremacy. In this arms race, capturing market share is vital.
CrowdStrike ranked first in the modern endpoint security market yet again, with a 17.7% share, edging out Microsoft at 16.4%, according to IDC . Even more crucial, CrowdStrike edged Microsoft 62% to 59% in growth.
The endpoint security industry expanded 27%, meaning CrowdStrike is growing more than twice as fast and seizing market share.
Gartner ( IT ) also named CrowdStrike a leader in endpoint protection for the third consecutive year.
Why is this important? CrowdStrike's Falcon platform retains customers at a rate consistently above 97%, and this is likely to continue.
Internal and external growth
CrowdStrike's growth has been phenomenal. The company was generating just $313 million in annual recurring revenue ((ARR)) at the end of fiscal 2019. This reached $2.34 billion last quarter on 54% year-over-year (YoY) growth.
This growth comes from two places: existing customers and new customers. CrowdStrike's Falcon platform is modular, and 60% of customers use at least five modules. But only 21% use at least seven modules, giving the company plenty of runway.
Dollar-based net retention
To this end, the company has a dollar-based net retention rate (DBNR) of over 120% (which is tremendous) and has maintained a DBNR above this level since Q1 fiscal 2019. DBNR rose last quarter despite the challenging economy. The execution here has been spectacular.
DBNR is a measure of revenue growth from existing customers; great explanation here .
Customer growth
As shown below, new customers have flocked to CrowdStrike over the last few years, driving ARR growth.
Data source: CrowdStrike. Chart by author.
Customer Quality
The company counts nearly 70% of the Fortune 100 and more than 50% of the Fortune 500 as customers. This isn't just a vanity stat. CrowdStrike's average ARR per customer is over $110,000 (compared to a competitor like SentinelOne ( S ) at just over $50,000). It is significantly easier to profit from a pool of larger customers.
Free cash flow and scalability
Growth companies need to transition to profitability and cash-flow generation eventually. What are some of the metrics that make this possible?
Gross margin is one key. A high gross margin allows the company to scale more quickly as revenue growth outpaces the growth of semi-fixed operating costs. CrowdStrike's gross margin is massive at over 75% on a GAAP basis.
Because of this, its operating leverage has fallen dramatically over the years, which is terrific. For instance, in the fiscal year 2020, operating expenses swallowed up 86% of sales, but this fell to just 59% through Q3 fiscal 2023 on a non-GAAP basis. Unfortunately, this has not translated to GAAP results due to increases in stock-based compensation (SBC).
SBC could be better; however, it has allowed CrowdStrike to build a cash hoard of $2.5 billion while dramatically increasing free cash flow. Free cash flow reached $442 million in fiscal 2022 and has grown 49% through Q3 fiscal 2023 to $467 million.
Given this strong cash position and no substantial debt payments due until 2029, investors may see a stock buyback plan soon. This could offset the effects of SBC and benefit shareholders significantly. It could also boost the share price in the near term.
Is CrowdStrike stock a buy?
CrowdStrike stock trades at price-to-sales (P/S) and price-to-cash from operations ratios lower than before the pandemic, as shown below.
The stock price is ~50% off its 52-week high. However, it is still richly valued and a growth stock that will be volatile, so it isn't appropriate for risk-averse investors.
Companies can ill afford to scrimp on cybersecurity. It's just not good practice. This bodes well for CrowdStrike's ability to weather a recession and have pricing power in the market. It's a dominant force in endpoint security, with growth outpacing the market 2:1, and it has outstanding leadership and financial metrics. It checks all the boxes as an excellent growth stock for the long haul.
For further details see:
Was I Right To Double Down On CrowdStrike With Earnings On Deck?