Cybersecurity is a growing necessity in our modern day digitally-connected world. Whether it’s the need to secure devices working remotely or to protect pipelines from Russian hackers, Cybersecurity has been called the 4th defensive strategy (Land, Air, Sea, and now Cybersecurity).
According to GlobeNewswire, The Cyber Security market globally is forecasted to grow at a 12% CAGR between 2022 and 2028, reaching a size of $366 billion. With the Russia-Ukraine crisis heating up and tensions with China & Taiwan, Cybersecurity is at the forefront of everyone’s mind. However, there has been a problem in the Cybersecurity industry, enterprises have clunky on-premise IT setups with little flexibility for instant upgrades and threat detection, this is where CrowdStrike comes in.
CrowdStrike (CRWD) was founded in 2011 with a goal to reinvent Security for the Cloud. They have leading, patent-protected technology, which has seen huge revenue growth of 81% in the prior year and 65% expected moving forward. Their share price is down 31% from its highs in November 2021, as inflation has caused growth stock multiples to compress. In this post, I’m going to dive into the platform, technology, financials, and valuation.
CrowdStrike’s Cutting-Edge Technology
CrowdStrike offers a leading “Security Cloud” software, which is on the Department of Homeland Securities approved products list. Their Flagship platform (Falcon) covers multiple large security markets; Cloud Security, Corporate endpoint security, Threat intelligence, Identity protection, and more. Endpoints such as Laptops, Servers, and IoT devices are becoming vulnerable to cyber-attacks, as the world transitions toward remote working and the Cloud.
CrowdStrike utilizes the power of Artificial Intelligence (AI) and its proprietary algorithms to detect threats and continuously improve the system as more data becomes available. This offers strong Network effects as more customers equal more big data, equal better AI, and better protection for customers. The business is also protected with 65 issued patents and 102 pending.
CrowdStrike Has An Established Customer Base
The firm has an established customer base equating to 254 of the Fortune 500, 65 of the Fortune 100, and 15 of the top 20 banks. Customers include Mercedes-AMG, Virgin Hyperloop, and Goldman Sachs (NYSE:GS). CrowdStrike is expecting 16,325 subscription customers by the end of 2022, up a further 65% year over year.
Land and Expand Strategy
CrowdStrike uses a “Land and Expand” strategy to win new enterprise customers. They offer a number of modules and “get their foot in the door” with just one or two modules, before easily upselling to more. The beauty of a cloud-based system is they can upsell in a very low friction way, additional cloud modules can easily be activated in real time. The firm also has a direct sales team which offers a very successful trial to pay model. In addition, partners can purchase through the AWS marketplace.
Their strategy is working great so far as customers are not just growing, they are sticking around and spending more. A great way of measuring this in Software-as-a-Service (SaaS) companies is via their net dollar retention rate, at CrowdStrike, this equates to above their 124% benchmark, which means the customers are staying and spending more. With 69% of their customers purchasing over 4 modules.
High Growth Financials
CrowdStrike smashed Wall Street expectations with annual recurring revenue (ARR) coming in at $1.73 billion, which is up an incredible 65% year-over-year, beating analyst expectations of $1.68 billion.
The firm also reported an adjusted earnings of 30 cents per share for Q4 2021, equating to $431 million in revenue. This was above analyst expectations of 20 cents and $411 million in revenue. In addition, the company has just become free cash flow positive with a record $442 million for the year.
As a software company, Gross margins are super high at 76%, but operating margins are negative as the firm invested heavily in R&D and Sales. Thus, they have a GAAP loss from operations of -$142 million, compared with $92.5 million in the prior year. Personally, I think the R&D and Sales investment is the right strategy, especially as the company is in such an early stage of growth. With $2 billion in cash and $738 million in long-term debt, the firm’s balance sheet is fairly healthy, in the short term anyway.
Is CRWD Stock Undervalued?
In order to value CrowdStrike, I have plugged in the latest financials into my discounted cash flow model. I have estimated 60% growth for the next year and 50% for the next 2 to 5 years. In addition, I have predicted margins to expand to 23% as the firm’s Sales and R&D bets start to pay off.
From these estimates, I get a valuation of $181/share, the stock is trading at $190, and thus 4% overvalued at the time of writing. This shows investors have slightly more bullish estimates than my own predictions baked into the stock. These may come to fruition and the firm has a track record of high growth, however, I like to be conservative for valuation purposes, especially given the current market for growth stocks.
Analyzing the stock’s Price to Sales ratio (forward), it is looking “cheap” at PS = 20, relative to historical metrics, Price to Sales of over 50.
Comparing the Price to Sales ratio to other cybersecurity companies in the space, it’s more expensive than most, but it’s also growing faster than a lot of the other players on this list.
The founder of CrowdStrike is George Kurtz and Dmitri Alperovitch. Kurtz is a veteran of the cybersecurity industry with over 29 years of experience. He was the former Chief Technology Officer at McAfee, CTO at GM, and founder of Foundstone in 1999, a worldwide security company. Kurtz owns 5.3% of the company and thus has “Skin in the Game”.
I like to follow the investment strategy of investing into great tech founders who have Skin in the Game, this is the same strategy great investors such as former Hedge Fund Manager Nick Sleep used when investing 40% of his fund into Amazon (NASDAQ:AMZN) stock because of Bezos.
Despite the founder having “Skin in the Game”, I did notice a lot of Insider selling by him at $208 and other board members, in Q4 2021. This is not a great sign to see given the bullish projections of the company.
CrowdStrike has incredible patent-protected technology and superior marketing, however, the firm still faces fierce competition. Alphabet (Google) (NASDAQ:GOOG) (NASDAQ:GOOGL) has recently made headlines by acquiring the Cybersecurity company Mandiant (MNDT) for $5.4 billion. Mandiant specializes in Global threat intelligence and has close relationships with the US government. For example, in recent times, the firm was brought into investigate the colonial pipeline cyber-attack.
Google acquired the company to strengthen their cloud security and compete with Microsoft (NASDAQ:MSFT), which developed a strong in-house threat intelligence expertise. In addition, the firm acquired smaller Cybersecurity firms such as RiskIQ and ReFirm Labs.
The only consolidation is Google Capital invested $55 million in CrowdStrike in 2015 and $60.7 million in 2017. Although these are “preferred shares” which act like a dividend-paying bond, it may influence Alphabet’s competitive mindset.
CrowdStrike is a fantastic company and a true leader in the Cloud Security Market for enterprises. The firm’s “Land and Expand” sales strategy is working wonders as the company is growing its customer base rapidly. After beating Wall Street expectations and with strong growth projections, the firm is poised for continued growth. The macro conditions of increased remote working and geopolitical uncertainty (Russia, China) should act as growth tailwinds behind the industry and make the purchase a “no brainer” for enterprises. The valuation has gotten “better” and you could say the stock is only slightly “overvalued” if the growth projections play out. However, the high inflation environment and a suspected rise in interest rates are compressing the multiples on all growth stocks, which means there are plenty of opportunities in the market.