After underperforming the broader markets in 2022, shares of the cybersecurity company CrowdStrike (CRWD) have recouped some of its losses. CRWD stock has gained over 43% year-to-date, outperforming the S&P 500 Index (SPY) ($SPX).
Despite the recent appreciation in price, the stock is trading well below its two-year high of $298.48 due to macro concerns that have limited enterprise spending. However, the ongoing digital transformation, the launch of the generative AI (Artificial Intelligence) tool, its growing enterprise customer base, cross-selling opportunities, and strategic partnerships augur well for long-term growth.
With this in the backdrop, let’s understand how high CrowdStrike stock could go and whether it should be part of your portfolio.
CrowdStrike Stock to Gain from Solid Platform Metric
CrowdStrike stock has multiple growth catalysts that support its bull case. One among them is its stellar platform metric. The company’s subscription customers are growing rapidly. For instance, it has grown from 2,516 in FY19 to 23,019 in FY23. Impressively, 62% of its customers are with five or more modules. Furthermore, 40% of its customers have six or more modules, and 23% are with 7+ modules.
The growing percentage of its subscription customers with multiple modules enables the company to generate incremental revenue per customer, improves margins, and reduces churn rate.
While CrowdStrike’s customer base with multiple modules is increasing, the cyber security industry is witnessing a consolidation due to the macro uncertainty. As an increased number of customers consolidate and modernize their security stack, CrowdStrike, with its Falcon platform, is poised to win market share and drive margins.
The company acquired two new Fortune 100 customers during the first quarter that are consolidating their security stack on Falcon. The company highlighted that these new customers purchased multiple modules, while one among them adopted nine modules.
Thus, the consolidation in the industry, the expansion of its existing products, and the development of new ones will increase customer stickiness on its platform. Moreover, it will drive multiple module adoption, expand the addressable market, and support margin growth.
Strategic Partnerships to Support Growth
CrowdStrike enters into partnerships with several companies to distribute its products, which provides a solid opportunity for growth. Thanks to its strategic partnership with Dell (DELL), CRWD won a new customer, a regional healthcare corporation, in the first quarter.
The company highlighted that it was a seven-figure total value deal, while the customer adopted eight Falcon modules. Management anticipates expanding its partnership with Dell and other managed service providers, which offers solid growth opportunities in the coming years.
CrowdStrike also entered into a strategic partnership with Pax8. The partnership will enable CrowdStrike to displace the legacy and NextGen product vendors and win more customers.
The AI Opportunity
CrowdStrike has been leveraging AI to drive better customer outcomes and efficiencies for years. The use of AI has benefited CRWD’s business by lowering costs and yielding higher margins. The company teamed up with Amazon’s (AMZN) AWS to develop powerful new generative AI applications. Moreover, it launched Charlotte AI, its generative AI security analyst.
Charlotte AI will help its customer to respond to threats faster and lower operational costs, and in turn, it will improve CRWD’s modules, drive multiple product adoption, and support margins.
CRWD’s Financial Performance Impress
The company’s rapid customer growth, new product launches, utilization of AI, and the adoption of multiple modules have consistently driven its revenue higher and reduced operating costs. CRWD’s annual recurring revenues are growing at a decent pace. Meanwhile, it generates solid subscription gross margins.
Over the years, CRWD has managed to lower its operating costs and expand its margins. CRWD’s operating expenses as a percentage of revenue have consistently declined since FY18. At the same time, its operating margin has grown from 7% in FY21 to 17% in the first quarter of FY24.
Given the macro concerns, its annual recurring revenue growth has moderated a bit, while its retention rate has declined slightly (still remains above its 120% benchmark). However, these issues are transitory, and CRWD, with its Falcon platform and AI applications, is poised to win new customers and displace legacy vendors.
The Final Takeaway
Despite macro pressure, CrowdStrike is well-positioned to deliver solid growth led by its robust pipeline, momentum with large customers, and growing success in closing deals involving eight or more modules. Further, the consolidation in the industry, increasing adoption of its Falcon platform, its ability to retain customers, and continued investments to enhance its technology platform and product functionality bode well for growth.
Given the recent run, CRWD stock is trading at a price-to-sales multiple of 15.8, which is high compared to peers. However, its premium valuation is warranted, given the solid growth opportunities.
Out of the 40 analysts covering CRWD stock, 34 have a “strong buy” recommendation, 2 analysts recommend a “Moderate Buy,” and 4 maintain a “Hold” recommendation. And at a current price of $151.63, CrowdStrike stock offers about 18% upside potential based on analysts’ mean price target of $178.97.
On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
