CrowdStrike (CRWD) is a global cybersecurity company. The company provides cloud-based platforms to protect critical endpoints and stop breaches, among other security offerings.
CrowdStrike stock, like many growth names, has undergone a severe pullback since late 2021. This has much to do with macroeconomic conditions like inflation and expected interest rate increases. Once seen as overvalued, CrowdStrike stock now trades at a much lower valuation.
I am bullish on CrowdStrike stock.
Pullback Make Valuation More Attractive
CrowdStrike is now trading roughly 45% down from its 52-week high. There are two likely reasons for this. First, inflation has now breached 7%, and the Federal Reserve will soon act to raise interest rates. This causes Wall Street to place lower values on growth stocks.
While some were initially expecting just two interest rate hikes in 2022, it now seems that four hikes are more likely. This situation appears to be exacerbated by profit-taking and general unease in the market. CrowdStrike stock has been in a persistent downtrend since November of 2021.
The second likely reason that CrowdStrike stock has suffered is the valuation. The stock traded at a price-to-sales (P/S) ratio well above 50 for much of the past year. This is an outlandish valuation even for a growth stock. After the recent downswing, the stock trades at a forward P/S ratio of ~25 for January 2022. This is obviously much better value for investors. When the market begins to turn the corner, look for CrowdStrike to become a hot commodity again.
Growth and SaaS Metrics Are Top-Notch
CrowdStrike is a software-as-a-service (SaaS) company. 94% of sales come from subscriptions and are annual recurring revenues (ARR). There are several key metrics to measure the success of SaaS companies, and CrowdStrike’s figures are pretty impressive.
CrowdStrike has recently surpassed the $1.5 billion mark for ARR. This marks an impressive milestone for the company. ARR has also grown 67% year-over-year, according to CrowdStrike’s latest investor presentation. This is incredible growth.
Further, total customers have risen 75% year-over-year to reach 14,687. CrowdStrike has a long runway for growth due to its predicted total addressable market of $116 billion by 2025.
CrowdStrike is investing heavily in sales and marketing to grow at this pace. For this reason, the company is not yet GAAP profitable and likely will not be for several more years. Investing in growth at this point is a savvy use of resources that will pay off in the future. The company shows strong signs of scalability, including a GAAP subscription gross margin of 76% as of Q3 Fiscal 2022.
Another positive sign is the company’s excellent dollar-based retention rate. CrowdStrike consistently reports a rate that is well above 120%. This means existing customers are spending more each period, on average, with the company than in the previous period.
One reason for this is adding more modules with their subscriptions. 55% of CrowdStrike’s customers use five or more modules. This clearly shows that customers are pleased with the product offerings and likely to stay with CrowdStrike for the long term.
Wall Street’s Take
Turning to Wall Street, analysts are extremely bullish on CrowdStrike stock, with a Strong Buy consensus rating based on 21 Buys, two Holds, and one Sell rating. Many of these analyst ratings have come recently, which shows that analysts are still bullish despite difficult macroconditions.
The average CrowdStrike price target of $277.35 implies 72.2% upside potential.
The Verdict on CrowdStrike
CrowdStrike has an excellent SaaS business model. The product is in high demand as cyberattacks and breaches are a constant threat. Sales are rising swiftly, and the company is gaining new customers efficiently. The current P/S ratio is much more attractive than it has been recently. Despite this, there are concerns.
The macroeconomic conditions remain unfavorable to CrowdStrike. However, these conditions are likely not going to be long term. The market will eventually turn around and begin making gains again. When it does, CrowdStrike should be a strong consideration for a long-term investor’s portfolio.
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