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Proprietary Data Insights Financial Pros Cloud-Based Security Stock Searches in the Last Month
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Cloud-Based Security |
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Opportunity in This Earnings Sell-Off |
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Earnings season hasn’t been kind to stocks this quarter. Names like Target, Lululemon, and Salesforce have gotten obliterated. Another company that disappointed this earnings season was CrowdStrike (CRWD). Trackstar, our proprietary sentiment indicator, saw interest in the company soar when financial pros’ average daily search volume went from between 25 and 40 to 752 in one day, putting its monthly search volume above better-known companies like Shopify, Nike, and PayPal. Cyber security is allegedly THE investment trend for the next decade. Research suggests the market size will grow 9.7% annually to a whopping $478.69 billion by 2030. So, with CRWD having all the trappings of a high-growth cash cow, we wanted to see whether the sell-off created a buying opportunity. CrowdStrike’s Business CrowdStrike offers a cloud-based endpoint protection platform for preventing security breaches. You might remember the company from its work with the Democratic National Committee and the Hillary Clinton campaign – when Russian hackers breached data in the DNC’s computer network. A PR nightmare to be sure. But one the company has moved past. Its Falcon platform offers endpoint security, XDR (extended detection and response), cloud security, threat intelligence, identity protection, and observability. While the company caters to businesses of all sizes, it’s a hit among major enterprises like Verizon, Yeti, Goldman Sachs, and Deloitte. Other security products are expensive, complex, and often ineffective. CrowdStrike utilizes cloud-native platform elements that some believe give it a competitive advantage. The company has 537 of the Global 2000, 69 of the Fortune 100, and 15 of the top 20 U.S. banks as customers. CrowdStrike generates most of its revenues by charging for subscriptions. In 2018, it had 1,242 subscription customers. As of Q3 2022, it has 21,146 subscription customers. The company offers 23 modules, with 60% of its subscription customers subscribing to five or more cloud modules, 36% subscribing to six or more, and 21% subscribing to seven or more. That results in a net dollar retention rate of more than 120%. Customers paying more than $1 million in new net annual recurring revenue were up 67% YoY. Source: CrowdStrike Financials Source: Stock Analysis In Q3 2022, CRWD achieved record cash flow of $243 million from its operations and record free cash flow of $174 million. The firm’s operating expenses have increased substantially in 2022, to $1.65 billion compared to $1.07 billion in 2021. But its loss from operations increased only slightly, from a loss of $142.6 million in 2021 to $152.2 million. Meanwhile, total revenues jumped from $1.45 billion to $2.04 billion. We credit this to CrowdStrike’s strong retention rate. Its annual recurring revenue rose 54% YoY to $2.34 billion as of October 31, 2022. And while CRWD isn’t profitable yet, it’s financially stable. The company has $2.5 billion in cash and $769 million in debt, with a current ratio of 1.7x. Valuation Source: Seeking Alpha CRWD trades at a P/E non-GAAP ratio of 82.8x, notably higher than cloud security companies Check Point Software Technologies (CHKP) at 18.1x and VMware (VMW) at 18.4x, but better than SentinelOne (S) and Okta (OKTA), which have P/E non-GAAP ratios of NM (not meaningful). While CRWD has grown substantially over the years and maintained an insane retention rate among its subscription customers, its stock trades at a hefty premium. Despite shares’ walloping this year, its price-to-sales ratio is arguably still high at 12.8x. In contrast, S is at 12.4x, CHKP is at 7.3x, VMW is at 3.7x, and OKTA is at 5.5x. Profitability Source: Seeking Alpha Investors are willing to look past CrowdStrike’s high valuation because it has extremely high gross profit margins – 73.5%. While this isn’t as high as CHKP at 87.4% or VMW at 81.5%, it’s better than S at 64.4% and OKTA at 69.6%. In 2018, CrowdStrike’s gross profit margins were 55%. The current 70s level tells us the company is becoming more efficient as it matures. CRWD may not be profitable yet, but it’s generating cash from its operations, $827.4 million, compared to S at -$176.8 million, CHKP at $1.1 billion, VMW at $3.8 billion, and OKTA at $23.2 million. Growth Source: Seeking Alpha Investors are excited about CRWD’s explosive growth rate. Its revenues are up 58.2% YoY, significantly higher than CHKP at 7.4%, VMW at 4.3%, and OKTA at 50.2%, but not as high as S at 114%. CrowdStrike has a strong retention rate among its subscribing customers, and 94% of its revenues come from subscriptions.
Our Opinion 6/10 Although CRWD isn’t profitable, it has an outstanding business, which is evident from its list of top-tier customers and strong retention rate. Additionally, it’s in a fast-growing sector. With shares down more than 40% YTD, we believe it’s a buying opportunity for patient investors with long-term horizons. Starting a position and adding to it on further dips should pay out over the next five years. |
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