Our proposition remains: The company is a leader in a growing cloud security space which should boost its market share
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 — it is subscription-based. Crowdstrike offers cybersecurity solutions to customers of various sizes.
This is one of the two stocks from our 2021 portfolio. Our case for the company is still the same, where the company is a leader in a niche industry set to grow at a strong rate which should enable the company 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 are dependent on the network effect for the growth in value of their businesses.
In its most recent 3QFY2022 ended October 31, 2021, results, the company posted a 67% y-o-y growth in annual recurring revenue, with 94% of revenues deriving from subscriptions. Having recurring revenue through subscriptions greatly benefits companies such as Crowdstrike as it provides the company with 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 also 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 also recorded a 75% y-o-y growth in its customer base, which ought to boost its network effect. In terms of prospects, the total addressable market for CrowdStrike’s business is around US$55 billion ($74.42 billion) and is expected to grow by 11% CAGR over the next two years. Further, there is much room for cloud security spending, which is an opportunity for companies such as Crowdstrike. With spending by companies on clouds security projected to hit over US$10 billion by 2023, Crowdstrike should be able to further deepen its moat and its network effect. This should be further augmented by the company’s expansion beyond devices to offering cloud security on all workloads, which should result in better margins.
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The customer net retention rate has also been above the 120% benchmark for the company over the past 12 quarters, with most of its subscription customers choosing multiple cloud module subscriptions as opposed to a single offering. Customer growth should also be boosted by the prevalence of high-profile cyberattacks. CrowdStrike’s competitors, mostly legacy providers such as McAfee and Symantec, are likely to have clients shift to more cloud, behavioural and AI-based offerings such as the ones provided by Crowdstrike. The company targets gross margins to be around 80% and free cash flow margins to be more than 30% over the upcoming financial quarters, which is strong guidance that should boost the share price if achieved.
Chart 1 illustrates the company’s operating cash flow and free cash flow over the past 11 quarters and shows strong cash flow growth within this period. The company is growing, with good cash flow generating potential, the company can look to further strengthen its presence in the cloud platform value chain, as seen in its acquisitions of companies over the past few financial periods, for example, SecureCircle, a SaaS-based cybersecurity service company. The company is net cash, unsurprisingly given its strong cash flow generating ability, hence solvency and liquidity should not be a problem for the company in the upcoming financial periods.
The recent drop in share price was mainly caused by a general sell-off for tech stocks, in which companies such as CrowdStrike were adversely affected. Further, rising interest rates, which was one of the reasons that triggered the selloff, would less likely be a problem for the company considering that it is net cash.
We think that the company is very cheap based on its current valuations, and will be one of the bigger names in the tech space through market cap growth over the next few years. Demand for cloud-based services will increase, and companies such as CrowdStrike, which are at the forefront of the security niche, should be able to strongly recover once the tech selloffs reverse.
Sentiments-wise, there are 27 “buy” calls two “hold” calls and one “sell” call on the company from analysts. The average target price for the company is around 75% above its current trading price of US$159.8.
Based on our in-house valuations, we think this company has the potential to hit upwards of 50% gains in share price over the next 12 months. This stock is for investors seeking strong growth with a relatively lower risk appetite.
