CrowdStrike’s (NASDAQ: CRWD) shares went through a 22% drop in pricing this year, creating a buying opportunity for the cybersecurity business. The company is adding a massive number of new customers to its Falcon platform, and the subscription business is seeing continued growth. Although the shares are not cheap, CrowdStrike earns on a free cash flow basis and I believe the risk profile remains very upside down over a long period of time!
CrowdStrike’s Subscription Business has Momentum
CrowdStrike offers its customers cybersecurity tools to protect them against the latest cyber threats. CrowdStrike’s products and services include identity protection, forensics or threat management, and the company continues to innovate, helping to expand the company’s overall addressable market. CrowdStrike sees a total addressable market of $ 58.3B for its core products and services, which is expected to grow to $ 71.1B in FY 2024.
The emerging threat landscape requires companies to continually upgrade their IT protections, making CrowdStrike’s cybersecurity business ideal for a subscription model. CrowdStrike’s revenues rose 61% in Q1’23 to $ 487.8M on strong customer acquisition. CrowdStrike subscription revenues, which represented 94% of all revenue in the first quarter, showed 64% year-on-year growth. A small portion of the revenues, $ 28.0M in Q1’23, came from Professional Services which includes incident response services, forensic and malware analysis, and attribution analysis. Professional Services is sold separately, but CrowdStrike said customers who use the company’s Professional Services often upgrade to a subscription to its Falcon cybersecurity platform.
Customer Acquisition And Monetization
CrowdStrike’s strong growth is driven by two factors: Acquisition of new customers as well as the higher product costs of existing customers.
To the first point, customer acquisition. CrowdStrike’s Falcon platform, which is supported by cloud-scale artificial intelligence and allows customers to secure company workloads, identities and data, is seeing strong customer interest. CrowdStrike ended the last quarter with 17,945 customers in its subscription business, showing 57% year-over-year growth. The cybersecurity firm added 1,620 net new customers to the ecosystem in the last quarter and a whopping 6,525 net new customers in the past twelve months.
In the second point, customer monetization. Cloud-space companies use dollar-based retention rates to measure monetization success. A dollar-based retention rate measures how many existing customers increase their spending on CrowdStrike products and services, from one reporting period to the next, and is usually expressed as a percentage. In Q1’23, CrowdStrike’s dollar-based retention rate was 123.9%, showing a steady improvement of 2.1 PP. This figure tells investors that CrowdStrike subscription customers increased their spending by 23.9% compared to the previous period.
CrowdStrike Earns on a Free Cash Flow Basis, Generating Margins in Excess 30%
Many cloud-based companies are not profitable, but CrowdStrike is. In the first quarter, CrowdStrike generated $ 157.5M in free cash flow compared to $ 117.3M in the earlier period, showing 34% growth per year. What I really like about CrowdStrike is that the company continues to achieve very high free cash flow margins of over 30%.
Attractive Revenue Opportunities In The Fast-Growing Cybersecurity Market
CrowdStrike’s revenue outlook for FY 2023 requires 51% year-over-year revenue growth, which is impressive considering that recession fears are growing. CrowdStrike expects revenues between $ 2.19B and $ 2.21B in FY 2023 and revenues between $ 512.7M and $ 516.8M in Q2’23. The second quarter guidance indicates 6% quarter-over-quarter top line growth.
There is no cybersecurity stock that is really cheap because the market expects massive revenue growth rates in the future. For CrowdStrike, the market expects the company to grow revenues to $ 3.83B in FY 2025 indicating an average annual top -line growth rate of 38%. These expected earnings can be seen in CrowdStrike’s P/S ratio of 12.4X. The revenue opportunity for CrowdStrike is enormous, and the company itself says it plans to grow to $ 5B in annual recurring revenues by 2025. Because the threat environment requires companies to constantly update their security protections, the long -term revenue outlook for CrowdStrike is very clear.
More Integrations and Security Partnerships
Cyberattacks are on the rise and are likely to continue to pose serious security challenges for companies in the future. This emerging threat landscape creates a huge opportunity for CrowdStrike to expand the reach of its platform, particularly through the CrowdXDR Alliance. This security alliance is a coalition of companies working together to reduce the risks of cyberattacks and includes companies such as Okta, ServiceNow, Zscaler, Netskope, Proofpoint and others. Menlo Security, a head of cloud security, recently joined the alliance. By joining the alliance, Menlo Security solutions will be integrated into the CrowdStrike Falcon platform, offering CrowdStrike customers better threat protection. By integrating the security solutions of other vendors, the Falcon platform will see growing adoption, which could ultimately also result in growing customer monetization.
The CrowdStrike marketplace is growing and customers are quickly signing up to the Falcon platform. Cyber threats are constantly evolving and companies are spending huge money to secure their data infrastructure, indicating attractive growth prospects, especially for CrowdStrike’s SaaS business.
However, in the short term, slowing revenue growth could be a problem for CrowdStrike if companies reduce IT security spending during the recession. What I also see as a potential risk for CrowdStrike is the weakening of customer monetization. Currently, the company’s customer monetization rate looks good, but it could drop if companies decide to reduce IT budgets to improve profitability during the recession.
CrowdStrike’s revenue for FY 2023 is very strong, especially when compared against the worsening growth outlook around the world. CrowdStrike is also highly profitable with regard to free cash flow and FCF margins of more than 30% show that CrowdStrike runs a very profitable business on the platform. While valuation isn’t cheap, the company’s growing market reach and tremendous growth potential are reasons to buy the stock!