Tech selldown drags down stock, but we still like it for its earnings growth visibility
Nasdaq-listed CrowdStrike Holdings is a leader in the cloud security space that provides endpoint security, threat intelligence, workload protection and cyber-attack response services. The company offers its cybersecurity services primarily through its CrowdStrike Falcon platform, which leverages the network effect of crowdsourced data.
CrowdStrike offers modules on its Falcon platform through a software-as-a-service (SaaS) model that covers multiple large security markets, including corporate workload security and threat intelligence services. CrowdStrike’s SaaS revenue model is similar to most companies that deploy SaaS in the cloud computing industry — subscription-based. CrowdStrike offers cybersecurity solutions to customers of various sizes.
CrowdStrike is another company we have retained from our 2022 portfolio, with the thesis for buying the company holding more water than ever. The company is a leader in a niche industry set to grow substantially, which should enable it to gain market share. CrowdStrike’s focus on the network effect by offering scalable, subscription-based products and solutions is strategic, as companies in the cloud industry depend on the network effect for the growth in value of their businesses.
Having a large proportion of recurring revenue through subscriptions greatly benefits companies such as CrowdStrike, giving the company good earnings visibility over the upcoming quarters. The company has a competitive advantage through better offerings in terms of functionality and efficacy due to better technology, with other security products being relatively more expensive and complex. It is further boosted by its cloud-scale AI, which gets smarter as it consumes most data. Given that the company covers a wide range of clients, this technology is likely to be enhanced, further strengthening its moat over competitors.
CrowdStrike’s new focus on workloads — including virtual servers — should expand its addressable market and improve its market share and leadership in cloud security. The company’s growth and expansion beyond devices such as laptops and phones to offer cloud security for all workloads should aid in expanding retention rates, as the current trend of enterprises is towards subscribing towards cloud security offerings, such as the ones provided by CrowdStrike. Further, add-on modules should provide further earnings visibility over the following few periods with the most recent acquisition of Reposify — an external attack surface management platform.
See also: More upside for Indian equities despite rich valuations
For the company’s most recent 3QFY2023 ended Oct 31, 2022, results, CrowdStrike saw a 54% increase in annual recurring revenue y-o-y growth, and a 53% increase in total revenue, with its gross subscription margin at a healthy 78%. Record operating cash flow and free cash flow were also achieved in this financial period at US$243 million ($312 million) and US$174 million, respectively. Operating margins improved from 7% in FY2021 to 16% in this period.
The company’s total addressable market continues to expand and is forecast to grow at a rate of 13% CAGR over the next year. Over the longer term, including future initiatives, planned offerings and the cloud security opportunity, the total addressable market is expected to be almost twice the current portfolio’s value in 2026. CrowdStrike’s target operating model is to achieve operating margins of over 20%, with a free cash flow margin of over 30% over the near term.
The company’s one-year total return was –41.4%, although its cash flow was excellent. CrowdStrike has had eight quarters of consecutive positive operating cash flow and free cash flow, as shown in the chart. Financial safety-wise, CrowdStrike’s current ratio is 1.8 times, indicating strong liquidity, and solvency should not be a concern as the company is net cash.
Sentiments-wise, CrowdStrike has 39 “buy” calls, four “hold” calls, and no “sell” calls, with a consensus target price of over 50% above its current trading price of US$99.53. Based on our in-house valuations of the company, we believe that the intrinsic value of the company is at least double its current trading price. As the demand for cloud-based services increases, companies like CrowdStrike — at the forefront of the security niche — should benefit greatly.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
Photo Credit: Bloomberg
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
