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Crowdstrike (CRWD) came in 6th amongst the top software stock searches by financial pros, which didn’t get our attention at first.

Yet, we found that the company generates positive cash flow and grows incredibly.

And that was the tip of the iceberg.

Growth stocks have fallen out of favor with investors.

The S&P 500 Pure Growth Index is down by -23.52%.

But is it right to paint all growth stocks and sectors with the same brush?

We don’t think it is in the case of Crowdstrike Holdings (CRWD). 

Crowdstrike provides intelligent security software that protects computer networks from cyber-attacks and hacking. 

Hacking is a growth business, and Checkpoint (CHKP) research suggests that organizations are now subject to as many as 1600 attacks a week. 

What’s more, the overall number of cyberattacks recorded in 2021 rose by a massive +75.0%.

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Crowdstrike’s Business 

Crowdstrike was founded in 2011 to provide security software for cloud computing that would work across servers, virtual machines, or individual laptops and PCs. 

Businesses of all sizes can use the firm’s software.

However, many of the company’s customers are blue-chip names, such as Credit Suisse, Sony, ADP, Rackspace, and Sega.

In June 2019, the firm raised $610 million via a successful IPO which valued the business at almost $7.0 billion. 

On its trading debut, Crowdstrike’s share price lept +97.0%, and its current market cap is $46.40 billion.

The firm operates a modular subscription model, with customers paying annual fees to use the firm’s software packages or modules.

This subscription model allows enterprise customers to choose the software modules they need and makes it easier to add to their selection. 

Adding new clients and growing subscriptions from existing customers means that Crowdstrike has two sources of revenue growth.

•  Crowdstrike has a strong position in a market that’s predicted to grow by +270.0% in 7 years.
• It currently has over 16,000 subscribers and annual recurring revenue, or ARR, of $1.73 billion.
• 69% of its customers subscribe to four or more software modules, while 57% have signed up for more than five.
• The company should generate an ARR of $5.0 billion by the financial year 2026.
• A compounded recurring revenue growth of more than +30.0% per annum.

Financials

Crowdstrike consistently grows its top line, with revenues rising from just $119.0 million in 2018 to $1.45 billion 2022.

Gross margins grew significantly too and now stand at 73.60%. Subscription margins are even higher at 79.0%.

The five-year revenue growth rate at Crowdstrike is over 94.0%, with the year-over-year rate running at 66.0%.

Since 2018 operating cash flow moved from -$59.0 million per annum to  +$575.0 million today.

Free cash flow stood at just $12.0 million in 2020. However, it reached $441.0 million in FY 2022. 

That’s more than 36 times higher than the 2020 figure, and it equates to a free cash flow of $1.83 per share.

What’s behind these growth figures and will they be sustained? 

Crowdstrike is attracting more customers who are spending more money on sign-up and who add to their subscriptions throughout their journey. 

For example, revenue generated by the firm from the professional services sector has grown at +44.0% per annum over the last five years. 

The growth rate in the total customer base over that period is +105.0% per annum.

New sign-ups averaged just 2.0 software modules in 2017, but that had risen to 4.70 modules in the financial year 2022.

There is plenty of room for continued growth in revenues from enterprise-scale customers and the corporate mid-market and public sectors. 

As the graphic above highlights, these segments remain largely untouched.

The firm’s ultimate goal is to become the largest cloud-based cyber security business globally, in an addressable market segment that could be worth $126.0 billion in the next three years alone.

The threat from cybercrime isn’t going away. If anything, it’s been boosted by the conflict in Ukraine. 

As we become an increasingly networked society, thanks to 5g, the internet of things (IoT), and the metaverse, demand for protection will only grow.

Cybercrime magazine estimates that in 2021 cybercrime will cost businesses and governments $6.0 trillion, or $190,000 per second. 

That figure could rise to $10.50 trillion by 2025.

Valuation

Turning to Crowdstrike’s valuation, the company’s revenue growth, both year over year, and looking forward, is far above the sector average, outperforming its peers by as much as +240.80%.

Crowdstrike is highly rated, and it trades on a forward price to sales ratio of 22.48 times. The sector median is way down at 3.17.

The company’s price to free cash flow ratio is also more than 4.0 times the sector midpoint.

Why is it trading on such premium ratings? 

The company grows faster than its peers.

For example, YoY revenue growth at CRWD was +2.36 times larger than at Fortinet (FTNT) and +7.16 times greater than VMware (VMW).

Over three and five years, CRWD wipes the floor with its rivals when it comes to compounded annual revenue growth numbers.

The company’s annual recurring revenue is currently growing at +65.0% year over year and is expected to reach $5.0 billion by FY 2026.

Profitability 

Let’s be upfront about it: Crowdstrike isn’t profitable yet. Last year it posted -$1.03 per share in EPS with a net income loss of -$235.0 million. The return on capital currently sits at -4.92%.

However, its gross profit margin of 73.60% is well above the average of its sector peers, at 50.29%. 

And, it generates cash, hand over fist, thanks to growing sales and those high gross margins.

Our Opinion 7/10

Crowdstrike is a growth stock that operates in a Cybersecurity market estimated to be worth $140.0 billion in 2021 but which is expected to grow to more than $376.0 billion by 2029.

The company gained market share by +178.0% since 2019.

Last year it added $681.0 million in new ARR and over 6,400 new subscribers. 

The compounded annual growth in customer numbers in the last 5-years is running at +105.0%.

Its current customers include 65 members of the Fortune 100 companies (+12.% YoY), 254 members of the Fortune 500 (+44.%YoY), as well as 15 out of the top 20 US banks (+25%YoY).

With positive cash flow, we expect Crowdstrike to continue increasing net margins and improving performance in the coming years.

As a speculative play, Crowdstrike is one of our favorites.