CrowdStrike: Falcon Of Growth

Summary

• First, I briefly describe CRWD's business and the opportunity.
• Next, I review several charts illustrating CRWD's success.
• Third, I discuss the Rule of 40 and Magic Number for CRWD.
• Then, I provide an overview of what analysts are saying.
• Lastly, I wrap up with some thoughts on what to do next.
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The Outline

Let's talk about CrowdStrike (NASDAQ:CRWD). Here's how the article will play out. First, I briefly describe CRWD's business and the opportunity. The market is large, and growing. CRWD is growing like crazy within that market. Next, I review several charts illustrating CRWD's success. It's a growth story, baby! Third, I discuss the Rule of 40 and Magic Number for CRWD. The numbers don't lie. It's a beast. Then, I provide an overview of what analysts are saying. In short, it just keeps getting better. Lastly, I wrap up with some thoughts on what to do next. Hint: I'm bullish.

The Basics

From Seeking Alpha:

CrowdStrike Holdings, Inc. provides cloud-delivered solutions for endpoint and cloud workload protection in the United States, Australia, Germany, India, Israel, Romania, and the United Kingdom. It offers 19 cloud modules on its Falcon platform through a software as a service subscription-based model that covers various security markets, such as corporate workload security, security and vulnerability management, managed security services, IT operations management, threat intelligence services, identity protection, and log management. The company primarily sells its platform and cloud modules through its direct sales team. CrowdStrike Holdings, Inc. was incorporated in 2011 and is headquartered in Sunnyvale, California. [Emphasis: Author's]

This is a cloud-based security company. Their mission: We Stop Breaches. Interestingly, they think very much in terms of the cloud. In 1999 we had Salesforce (CRM) offering a CRM via cloud, in 2004 we had ServiceNow (NOW) offering service management via cloud, in 2005 we had Workday (WDAY) offering HR via the cloud, and in 2011 we had CRWD offering cloud security.

The market is robust:

The Global Cloud Security Market is estimated to be USD 34.8 Bn in 2021 and is expected to reach USD 67.6 Bn by 2026, growing at a CAGR of 14.2%. [Emphasis: Author's]

CRWD demonstrates its total addressable market or "TAM" here:

CRWD TAM

While they view their TAM at just under $43 billion, with new offerings, and accelerated emphasis on IT security, CRWD believes its TAM could reach over $100 billion in 2025. So, the opportunity pie is increasing quite rapidly.

And, I like what I found here:

CrowdStrike's sales have been booming, and the company is currently the largest pure-play security vendor by market capitalizaton.

It's growing so fast that it's been added to the Nasdaq 100 index. And, again, CRWD has properly captured this growth in some charts for investors:

CRWD REVENUE GROWTH

As I've previously explained in PayPal: The Star Business, it appears to me that CRWD is a Star Business, as per the simple definition:

1. It operates in a high growth (10% CAGR) market or niche.
2. It is the #1 leader in the market.

If it doesn't exactly or perfectly fit Richard Koch's definition, then it's still close and it appears to be a mighty fine business in a mighty fine market. That's because not only is CRWD in a high growth market, it's also growing fast. And, it's likely the #1 leader in at least a few niche markets of substantial size.

All of this appears to be good news. Therefore, it makes sense to dig deeper, and continue moving forward.

The Charts

The numbers don't lie and this picture is worth 1,000 words, or more. Capital appreciation is on full display right here.

Data by YCharts

And, the financial backstory is that CRWD went public on June 12, 2019. It popped 87% to $63.50 before ending the day at $58, up over 70%.

About one month later, the analysts poured in:

Positive ratings are in from Bank of America Merrill Lynch (BUY), Mizuho (BUY), Needham (BUY), Stifel (BUY), JMP (Outperform), Macquarie (Outperform), Barclays (Outperform) and JPMorgan (Outperform). The highest price targets from the bunch were from JPMorgan at $100 and Oppenheimer at $90.

From that time until now, there's been another good reason for optimism:

Data by YCharts

In other words, real money is pouring into CRWD. Here are the details if you'd like to dive deeper yourself:

CRWD FREE CASH FLOW

Rule of 40 and Magic Number

As you might already know, I discussed Palantir (PLTR) via the Rule of 40. As I referenced in that article:

The Rule of 40 is a common metric used by private equity investors and strategic buyers to measure the performance of SaaS companies. Measuring the trade-off between profitability and growth, the Rule of 40 asserts that a successful SaaS company's growth rate and profit margin should add up to 40% or more. [Emphasis: Author's]

Well, CRWD is at 80% using the Rule of 40 definition. Furthermore, CRWD also does well with its Magic Number, as defined here:

To gauge the efficiency of a company's go-to-market model, CMOs are increasingly using a metric called the 'Magic Number.' The Magic Number is the product of a simple equation: Start with the difference in new customer revenues between the most recent two quarters. Divide that number by the earlier quarter's sales and marketing total expenditures (people and program dollars) for acquiring new customers. Multiply by four to annualize, and … voila.

Furthermore:

Common thinking is that a Magic Number greater than 1, is a compelling business investment, a result below .5 is a company that has not figured out an efficient go-to-market model, and a result in between is a company that needs improvement before scaling (or becoming a public company). A company with a Magic Number above 1.5 is amazing - pour more fuel on the fire! [Emphasis: Author's]

CRWD has a Magic Number of 1.4 which obviously is just a bit short of amazing, per the definition and elaboration.

Certainly there is more we could investigate. However, by nearly every measure, the story is the same: growth, growth, and more growth. For example, here's what we learned in Q2:

• Revenue of $337.69M (+69.7% Y/Y) beats by $14.16M.
• Record net new ARR of $151 million.
• Record 1,660 net new subscription customers (81% growth YoY).

And, they raised their guidance twice this year:

"In the second quarter we once again achieved strong growth at scale and delivered exceptional unit economics, drove leverage and remained capital efficient, generating strong operating and free cash flow. Given our strong performance and growing momentum in the market, and reflecting our view of a continued robust demand environment, we are raising our guidance for fiscal year 2022," says Chief Financial Officer Burt Podbere.

Even more:

CrowdStrike has topped consensus EPS estimates every quarter since going public in the summer of 2019.

In short, CRWD is winning, over and over.

The Analysts

Although I'm bullish on CRWD, it's often a good idea to at least sniff around a bit, to find out what the analysts are saying. Here's a quick sample.

CRWD ANALYSTS SUMMARY

This takes a quick minute to understand but I love this view. Basically, the "decline" in red and yellow indicates that analysts are less bearish. And, the increase in light green and dark green indicates that analysts are more bullish. Therefore, the picture here is clear.

Over the last two years, analysts are growing less negative and more positive. It's a beautiful picture, especially if you've been a bullish investor. The analysts are confirming your beliefs.

Furthermore, we can see a range of $280 to $340 for CRWD over the next 12 months, as per a consensus of 19 analysts:

CRWD ANALYST CONSENSUS PRICE TARGETS

Still another view, from CNN, where we see a range of $264 to $340.

CRWD ANALYST CONSENSUS

The Bull

I've been watching CRWD for a while. However, I've been worried about valuation. Maybe like you? If you're worried about overvaluation, I can't blame you. The price always appears to be too high. (Always.)

At the same time, as I've explained in Growth Stock Renegade, some of my very highest gains have been coming from growth stocks that start with very high valuations. But, as we've seen here with CRWD, there's a good reason for the relentlessly growing price. There is very real growth. The customer base is increasing, cash is flowing, and the market is likely to be on fire for years.

Investors could do much worse than CRWD. I'm not yet a buyer, but I am officially bullish at this point.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PYPL, PLTR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.