I am bullish on CrowdStrike (CRWD) because its growing revenue and recent press releases indicate growth and a competitive advantage. (See Analysts’ Top Stocks on TipRanks)
Company Overview
CrowdStrike provides cloud-delivered endpoint security solutions for its customers in the United States, Australia, Germany, India, Israel, Romania, and the United Kingdom. The company offers many security solutions, and its customers tend to use multiple once onboarded.
Future Outlook
CrowdStrike had a rough week last week, with the stock price dropping over 35% from all-time highs. Volatility is a normal aspect of owning this stock, as it saw nearly a 65% drop during March of 2020. Despite the volatility, the company has experienced consistent growth and healthy free cash flow margins.
Subscriptions are up 75% from last year, and 68% of CrowdStrike’s customers use four or more modules on the platform. What this means for investors is that Crowdstrike is not only growing but creating a “sticky” platform for its customers.
When customers come on board, they are less likely to leave if the company solves many of their problems. This is similar to the concept of using Apple’s ecosystem. Once you are in the ecosystem, it’s difficult to leave.
Falcon Horizon, one of CrowdStrike’s modules, now supports Google cloud environments. This is important because it now provides services to all three major cloud services providers (Google, Amazon, and Microsoft).
In the last press release, the company announced Falcon Forensics, another company division, has achieved FedRAMP authorization. This gives it the potential to work with government customers and further expand its potential base.
On December 1, 2021, CrowdStrike announced that the Cybersecurity and Infrastructure Security Agency (CISA) selected the company as one of the major platforms to support the Executive Order (EO) Endpoint detection and response initiative. This is an executive order for government entities to increase the use of cloud-based cybersecurity solutions, and CrowdStrike is now one of those providers.
In late November, the company acquired SecureCircle. This Acquisition will expand The Company’s capabilities to enforce Zero Trust at the data layer. Zero Trust is a strategy that helps prevent data breaches by eliminating the trust from an organization’s network architecture.
Without Zero Trust, everything inside an organization’s network is trusted; therefore, if one part of a network is compromised, the whole network is compromised. The Acquisition of SecureCircle will advance its ability to secure networks as the ever-changing cybersecurity landscape evolves and provides more solutions to its customers.
Company Financials
CrowdStrike manages its balance sheet very well and holds enough short-term assets to cover its short and long-term liabilities combined. At the end of October 31, 2020, the company had $739 million in long-term debt, bringing its debt to equity coverage relatively high at 78%. Still, the company has $1.9 billion in cash, allowing it to easily cover any debt obligations.
The company has been free cash flow positive since January 2020, with revenues and cash flow continuing to climb. The company is still posting a loss on earnings with a $410.975 million loss per year as of October. Although CrowdStrike is currently unprofitable, its free cash flow grew by 69.5% in the last 12 months.
Valuation
Valuing a growth company is very difficult due to the forecasting necessary. For the valuation to justify its current price, the company will need to grow its free cash flow by an average of 52.9% annually.
Generally, I am not bullish on companies with valuations so high, but in the case of CrowdStrike, its story is solid. Investors may see a rally up to previous highs following the recent market correction.
The calculation to find the company at fair value starts with $410.975 in free cash flow. Cash flows grow at 52.9% annually and are discounted by its weighted average cost of capital at 6.9%.
At current levels, the company has enough cash to look for more Acquisitions and further develop its product lineup. For these reasons, superior growth is likely to follow due to the track record of successful customer engagement.
Considering that the landscape of the cyber security market is forecasted to grow at nearly 10% annually and that CrowdStrike will likely become a major player in the industry, I support a $260 price target.
Risks
The Chief Technology Officer left the company in 2020 and still has not been adequately replaced. In the cybersecurity market, technology solutions must be ahead of the game at all times, and losing this key member of the management team could present short-term difficulties as the company continues its efforts to improve its products.
In addition, the CEO continues to speak negatively toward Microsoft. These antics are poor form and could result in a rivalry CrowdStrike cannot afford to have. The company also sponsors an F1 team which is frivolous and slightly irresponsible considering it is still is not profitable from an earnings perspective.
Wall Street’s Take
Turning to Wall Street, Crowdstrike has a Strong Buy consensus rating, based on 13 Buys, two Holds, and one Sell assigned in the last three months. At $289.20, the average CrowdStrike price target implies 40.8% upside potential.
Final Thoughts
The company has the potential to compete with the best in the industry. In the short term, the company needs to refine its focus to business-building activities and maintain cordial relationships with its technology market cohorts rather than speaking negatively about them.
CrowdStrike has announced some impressive accolades in the last weeks, and with the market poised to rally once more, the company may be a winning opportunity for investors.
Disclosure: At the time of publication, Aaron Stine did not have a position in any of the securities mentioned in this article.
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