CrowdStrike: Very High-Quality Cyber Stock, Cheaply Valued
- CrowdStrike reported a very strong set of results and guidance. Yet, its share price has barely moved post-earnings.
- CrowdStrike goes mano-a-mano on its earnings call against SentinelOne.
- Why paying 24x forward sales isn't that expensive.
- I do much more than just articles at Deep Value Returns: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
CrowdStrike (NASDAQ:CRWD) is a cybersecurity company. It detects breaches in a multi-cloud environment. This is a founder-led business, that continues to profitably grow its business at a very fast clip.
Presently, investors are asked to pay 24x forward sales, which is towards the cheapest valuation this stock has traded for in the past year.
This is high-quality cloud-native endpoint security, with impressive financials. Well worth considering. Here's why:
Cybersecurity Names Fall Out Of Favor
CrowdStrike was last year's darling, with its stock jumping more than 4x in 2020.
However, as we've seen with countless other names in this space, many of the big winners of last year have been thrown out by the market this year.
As it looks right now, it appears that CrowdStrike will not be a big winner in 2021. However, as you'll read there's much to get behind this name.
Revenue Growth Rates Remain Impressive
Source: author's calculations; **high-end company guide
CrowdStrike made its IPO three years ago and since its IPO, CrowdStrike has continued to report very strong revenue growth rates.
In fact, I remember BlackBerry's (BB) CEO John Chen defending his company's acquisition of cybersecurity company Cylance arguing that CrowdStrike couldn't possibly sustain its high growth rates for long. Well, lo and behold, despite being on a run-rate of just under $2 billion in revenues, CrowdStrike is showing no sign of slowing down. And where is Cylance today?
Why CrowdStrike? Why Now?
CrowdStrike is a cloud-native platform aimed at stopping data breaches. Through Falcon, it detects threats and stops breaches. CrowdStrike is a multi-tenant, hybrid platform aimed at protecting workloads at any endpoint. Whether it's an app, mobile, IoT device, or cloud container.
Further, during the quarter CrowdStrike broaden the reach of its Falcon platform to embrace Extended Detection Response (''XDR''), in addition to offering firewall management and threat hunting.
What's more, during the earnings call, management highlighted how CrowdStrike outcompeted SentinelOne (S):
[...] one of the largest nonprofit hospital systems in the U.S. which had initially chosen the recently public next-gen vendor [SentinelOne] based on price and promised features that were never delivered.
And this brings me to my next crucial point. I've said it before, and I'll say it again: follow the customer.
If you are seeing rapid customer adoption, the odds are strong that you have a thriving business.
If your company is adopted by 63 out of the Fortune 100 companies, you can rest assured that the business is not only of very high quality, but that if CrowdStrike was offering anything less than stellar value proposition, those large companies with ample financial resources and technological acumen wouldn't be CrowdStrike customers.
High-Profit Margins Business
The next aspect to consider about CrowdStrike is that it has a very high free cash flow margin business.
(Source): Q3 2022 Press Statement
As you can see above, for Q3 2022 CrowdStrike reported 32% free cash flow margins, which was consistent with both the same period a year ago and the trailing nine months to date.
Unlike countless other fast-growing subscription business models, CrowdStrike actually converts its revenues into free cash flows.
Valuation -- Undoubtedly Attractively Priced
Presently, CrowdStrike is priced at 24x forward sales. To give you a sense of the opportunity, consider that just a few weeks ago, CrowdStrike was priced at mid-30x forward sales.
And you may contend that previously the stock was expensive, and that now it's simply fairly priced. To that, I would counter with the fact that some of its peers are meaningfully more expensive despite being exposed to substantially the same risks and opportunities.
For example, SentinelOne which I've already briefly mentioned above is priced at 39x forward sales. Obviously, one could remark that SentinelOne is expected to grow at meaningfully faster rates into next year.
To that, I would reply that SentinelOne wouldn't know a profit if it found it on the street. Its most recent results saw negative 40% non-GAAP operating margins
Another worthwhile comparison could be identity management company, Okta (OKTA). Okta isn't expected to grow as fast as CrowdStrike, yet it's priced at 18x forward sales. Again, Okta's profit margins don't hold a candle to CrowdStrike.
The Bottom Line
CrowdStrike has been through a brutal period in the last few weeks. However, as we can see from its results, fundamentally, CrowdStrike remains in top shape.
Very few companies are able to grow at nearly $2 billion of revenues at the rate as quickly as CrowdStrike. And the few that do, aren't able to report more than 30% free cash flow margins.
Paying 24x forward sales is perhaps as cheap as this stock isn't going to stay.
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