Growth stocks like CrowdStrike (NASDAQ:CRWD) offer investors an enviable risk-reward profile. Shares of the cybersecurity company are down 45% from record levels seen in November 2021. Typically, quality growth stocks deliver outsized returns in bull markets. Alternatively, they also tend to heavily underperform the broader market in bear markets. Nonetheless, market volatility offers investors a chance to buy quality stocks, such as CRWD, at lower-than-usual prices. Therefore, I’m bullish on CRWD stock.
CrowdStrike’s Approach: Cloud-Centric Cyber Defense
Founded in 2011, CrowdStrike aims to disrupt the cybersecurity sector. According to the company, while the nature of cybersecurity problems had changed, the solutions remained the same, allowing it to introduce a disruptive cloud-based enterprise-facing platform.
CrowdStrike built its Falcon platform to detect threats and stop breaches. It also created the first multi-tenant, cloud-native intelligent security solution that can protect workloads across environments such as on-premise, virtualized, and cloud while running on multiple endpoints, including laptops, desktops, servers, and IoT (Internet-of-Things) devices.
The firm has expanded its portfolio of solutions in the past decade and now offers 27 cloud modules on the Falcon platform via a SaaS (subscription-as-a-service) model. It has successfully replaced legacy solutions in verticals such as endpoint security, managed security services, cloud security, threat intelligence, data protection, and much more.
Quickly Growing Sales; Solid Financials
CrowdStrike has managed to increase its sales from $481 million in Fiscal 2020 to $2.24 billion in Fiscal 2023 (ended in January). This suggests its top line has grown at a CAGR (compound annual growth rate) of 67% in the last three fiscal years.
While its growth rate has decelerated in recent months, it still reported revenue of $731.6 million in Fiscal Q2 2024, a solid increase of 37% year-over-year. The company’s subscription sales in Q2 stood at $690 million, up 36% from the year-ago period, accounting for 94% of total revenue. Subscription sales are typically tied to long-term contracts, allowing CrowdStrike to report consistent cash flows across business cycles.
Also, CrowdStrike ended Q2 with an annual recurring revenue of $2.93 billion, an increase of 37% year-over-year. It’s also a massive increase from its ARR of $90 million in Q2 of Fiscal 2018. The tech giant has successfully expanded its customer base over the years and enjoys a strong customer retention rate.
In Q2, its dollar-based net retention rate stood at 125.3%, which suggests existing customers increased spending on the CrowdStrike platform by 25.3% in the last 12 months. Around 63% of customers subscribe to more than five modules, while 24% of customers subscribe to at least seven modules.
In the last two quarters, CrowdStrike reported a non-GAAP subscription gross margin of 80%. An asset-light model allows tech companies, including CrowdStrike, to benefit from high operating leverage at scale.
For instance, in Fiscal 2018, CrowdStrike’s sales & marketing expenses accounted for 87% of sales, followed by research and development at 46% and administrative expenses at 21%. In Fiscal 2023, these expenses accounted for less than 60% of revenue, allowing the company to report an operating profit margin of 19%.
Unlike several other high-growth tech stocks, CrowdStrike also reports positive free cash flow (FCF). Its FCF has risen from $293 million in Fiscal 2021 to $677 million in 2023. In the last two quarters, it has generated FCF of $416 million, indicating an FCF margin of 29%.
CrowdStrike is Part of a Rapidly Expanding Market
The number of cyberattacks has grown at an exponential rate in the past decade, which has raised demand for new-age digital security solutions. A study from CyberEdge Group estimates the average downtime cost of a ransomware attack to be around $5.1 million if we include lost productivity costs and sales, as well as post-attack expenses such as legal fees and loss of customers.
According to a report from Fortune Business Insights, the global cybersecurity market was valued at $153.65 billion in 2022 and might touch $425 billion in 2030, indicating a compound annual growth rate of 13.8% in this period.
In its investor presentation, CrowdStrike also emphasized its total addressable is forecast to expand from $76.1 billion in 2023 to $97.8 billion in 2025, providing it with enough room to grow its top line.
Clearly, CrowdStrike is well-positioned to benefit from multiple secular tailwinds, making it one of the hottest cyber security stocks in the world. Moreover, companies are unlikely to lower their cybersecurity spending even during periods of macro downturns, making CrowdStrike a recession-resistant investment.
Is CRWD Stock a Buy, According to Analysts?
Analysts tracking CRWD stock expect Fiscal 2024 sales to increase by 35.6% year-over-year to $3.04 billion. Its adjusted earnings are forecast to rise by 83% to $2.83 per share. Priced at 57x forward earnings and 12.7x forward sales, CRWD stock is still quite expensive. But growth stocks generally command a premium, and analysts remain bullish on the cybersecurity heavyweight.
Out of the 33 analysts covering CrowdStrike stock, 30 recommend a Buy, and three recommend a Hold. The average CrowdStrike stock price target is $191.94, which is 17.4% higher than its current trading price.
The Key Takeaway
CrowdStrike looks like a top long-term investment, given its improving profit margins, widening customer base, higher customer spending, and expanding addressable market. While CRWD stock has trailed the broader markets in the last two years, it continues to increase its sales at a stellar pace despite a challenging macro environment. Analysts remain bullish on the tech stock, and CrowdStrike is positioned to deliver outsized gains over time.
