CrowdStrike Stock Analysis: The Falcon Cybersecurity Platform is unstoppable
Things are going extremely well for the only cybersecurity share in my portfolio. What comes next after the price tripled in just 15 months?
Fortunately, I took advantage of the sell-off in SaaS stocks at the end of 2022 to add cybersecurity provider CrowdStrike CRWD 0.00%↑ to my model portfolio at prices around 100 USD. Only 15 months later, we see book profits of over 200%.
This makes CrowdStrike one of my best investments in recent years. As a reminder, I made triple-digit gains on CrowdStrike in this portfolio back in mid-2021 and exited the stock after it had run hot.
Now the CrowdStrike share has reached new highs. With this analysis I would like to clarify whether it is time to take profits again.
Firstly, for those of you who are unfamiliar with CrowdStrike:
Founded in 2011, the US SaaS company has grown from an endpoint security specialist to one of the world's leading cybersecurity providers since its IPO in 2019. The company, which has grown rapidly in just 12 years to more than 3 billion USD in revenue, offers a cloud-based platform called Falcon. This enables organisations to protect their systems and data from cyber attacks with a wide range of security solutions.
The associated software subscriptions account for well over 90% of total revenue. Building on its leading position in endpoint protection, CrowdStrike is using the Falcon platform to take on established niche vendors in other security areas such as cloud security, identity security and SIEM (Security Information and Event Management).
CrowdStrike Quarterly Figures for Q4 FY24
CrowdStrike ended its FY24, which ended already in January, with declining growth rates, but still with a result well above expectations. This is all the more remarkable given that key competitors such as Palo Alto Networks PANW 0.00%↑ have complained of particularly difficult economic conditions and reported disappointing figures.
CrowdStrike's revenues grew 36% to 3.06 billion USD in FY24, after growing 54% to 2.24 billion USD for the full year in FY23. In the most recent Q4 FY24, growth was 'only' 33%.
Particularly positive: The final quarter of FY24 was the second consecutive record quarter in terms of new ARR, which totaled 282 million USD in Q4.
The equally positive cash flow performance is particularly impressive given the strong revenue growth. In FY24, free cash flow (FCF) increased by 39% to 938 million USD, representing an FCF margin of 31%.
The Rule-of-40 score (explained in simple terms here), which I look at closely and which measures the efficiency of growth, is 67%. This is an outstanding figure for a company with revenues of more than 3 billion USD.
High stock based compensation weighs on net profit
CrowdStrike has been critizised by many hobby analysts for years because of the high level of stock-based compensation (SBC) paid to employees. In FY24, the total SBC recognized was 632 million USD, or 21% of revenue.
I am - like most professional investors - relatively relaxed about the high SBCs. It is the dilution to shareholders (i.e. the change in the number of shares outstanding) that counts.
I’ll explain in another article (probably next week) the background of these common misunderstanding of SBC, so please subscribe to this Substack in order to make sure you won’t miss it:
The number of shares issued by CrowdStrike has increased by less than 8% over the last three years. Management is also committed to keeping dilution below 3% for the current FY25.
That's what really matters to me! And that sounds a lot less threatening and puts the high SBCs into perspective, doesn't it?
CrowdStrike Achieves GAAP Profitability
Despite the high SBC, CrowdStrike's GAAP results were positive for the first time in FY24. This was due in part to interest income on the company's large cash balance: the current 3.5 billion USD of cash on CrowdStrike's balance sheet is now generating significant interest income of over 30 million USD per quarter. CrowdStrike's net income for FY24 was 90 million USD, compared to a loss of 182 million USD in the previous year. GAAP operating income was also slightly positive for the first time in the second half of FY24.
These GAAP figures are particularly important for a possible inclusion in the S+P 500 index. Only companies with a positive GAAP result are included in this index. This requirement is now met. Inclusion in the index would create further demand for the CrowdStrike share. This is because all passive investment vehicles such as ETFs that track the S+P 500 would have to include the stock in their portfolios. The resulting effect on the stocks concerned has become much greater in recent years due to the increased market share of passive investments.
CrowdStrike outlook for FY25
For the financial year FY25, which began in February, CrowdStrike's management expects revenues of just under 4 billion USD. This represents growth of just over 30% compared to 36% in the previous year.
Non-GAAP operating income is expected to increase from 660 million USD in FY25 to up to 913 million USD. This represents an increase of 38% and a margin of 23%.
I consider this initial guidance to be very conservative and expect, as last year, a series of "beat+raise" quarters that should end with a much more significant increase in earnings.
Even more important than the short-term guidance for the current financial year is the longer-term outlook that CrowdStrike published a few months ago (read here). CrowdStrike's recurring subscription revenue is expected to grow to over 10 billion USD over the next 5-7 years, more than tripling from FY24, and the free cash flow margin is expected to increase from 31% today to up to 38%.
Rapidly Growing TAM
According to the company, CrowdStrike's total addressable market (TAM) will continue to grow rapidly in the coming years. Since the company's IPO 5 years ago, its TAM has already quintupled to 100 billion USD, driven in part by CrowdStrike's ability to address new niches in the cybersecurity market. CrowdStrike's revenue has grown tenfold during this period!
Over the next five years, CrowdStrike's TAM is expected to more than double to 225 billion USD by 2028, driven by organic growth in the cybersecurity market as well as the company's new solutions.
CrowdStrike's comprehensive Falcon platform is already frequently used by customers to replace competing solutions. The following chart shows the various competitors in the various cybersecurity disciplines.
I expect CrowdStrike to continue to gain share in the booming cybersecurity market due to the wide range of solutions available. CrowdStrike's relatively young cloud security, identity management and SIEM products already contribute over 850 million USD or 28% of recurring revenue and are all growing at triple-digit rates.
We can expect CrowdStrike's Falcon platform to become a leader in other areas of cybersecurity beyond endpoint management within a few years. With this in mind, I believe CrowdStrike's stated revenue target of at least 10 billion USD by 2028 is very realistic.
CrowdStrike and AI
Fortunately, CrowdStrike is not perceived by the investment community as an "AI stock" and has not been affected by the AI hype. However, the company (like many others) has been using machine learning algorithms in its core technologies for years.
CrowdStrike is tapping into the current trend towards generative AI with a new development called Charlotte AI. This is a GenAI-powered virtual security analyst designed to make life easier for users of the CrowdStrike Falcon platform.
In a change from previous plans, CrowdStrike also intends to directly monetize the Charlotte AI. CrowdStrike plans to charge 20 USD per endpoint per year for Charlotte. The extent to which the AI can actually be a relevant additional revenue stream remains to be seen. I see it as an improvement to the user interface and a better way for inexperienced users of the Falcon platform, rather than a true virtual employee that could make human security analysts obsolete.
Valuation of CrowdStrike stock
Things are going extremely well at CrowdStrike. The company is delivering impressive results quarter after quarter, even in a difficult economic environment. These successes have been more than rewarded by investors over the past 15 months:
CrowdStrike's shares have more than tripled since the beginning of 2023. At a share price of $323, CrowdStrike is valued at an Enterprise Value (EV, explained in simple terms here) of around $75 billion.
The EV/sales ratio is therefore around 19 (on a forward basis, i.e. based on the sales of the current financial year, FY25). The cash flow multiple of currently 80 (TTM) should be around 60 at the end of FY25.
This is already a very sporty price, and a consolidation would certainly be good for the stock, which has risen a bit too fast.
On the other hand, CrowdStrike's valuation is nowhere near as extreme as it was in the second half of 2021, when I temporarily exited the company.
Back in 2021 both sales and cash flow multiples were more than double the current levels.
Conclusion
I do not expect the CrowdStrike stock to make any more big moves in the short term, but I would definitely like to invest in a market leader in cybersecurity in the long term.
Prices of over 300 USD now represent a very ambitious price again after the +200% rally of the last 15 months. Even taking into account the strong market position and the continued rapid growth in sales and cash flow, the share is now only a good hold for me.
I have already taken some profits in my model portfolio and reduced the weighting of the CrowdStrike share. A complete exit is not currently planned, as I believe the company will be able to fundamentally grow to its current market value over the next few years and beyond in the long term.
If you would like to continue watching CrowdStrike with me in the future, you can
*Disclaimer:
The author and/or associated persons or companies own shares in CrowdStrike. This article is an expression of opinion and does not constitute any investment or financial advice.