CrowdStrike: Building the Data Security Cloud

CWRD stock has gotten frothy, though long-term fundamentals remain strong

CrowdStrike (NASDAQ:CRWD) stock is having quite the second act. In 2019, the data security company had a triumphant initial public offering. The IPO was highly subscribed as investors rushed to get in. Once it started trading, CrowdStrike surged from $60 to $100 virtually overnight.

Image of Crowdstrike (CRWD) logo on a mobile phone lying on a wooden table
Source: Piotr Swat / Shutterstock.com

Then the doubters emerged. The company got caught in some political controversies. Additionally, analysts questioned how sustainable revenue growth would be.

Then you had the novel coronavirus hit and cause stocks to drop in general. By the end of it, CrowdStrike had lost two-thirds of its value, with shares bottoming at $32. Now, however, they’ve recouped all those losses and more, with shares hitting fresh record highs.

CrowdStrike’s durability comes thanks to several factors. One, you have the same dynamic that has helped many tech companies; as people work from home more, companies need to upgrade their network infrastructure. CrowdStrike, with its all-in-one data security platform, is a natural beneficiary.

Furthermore, CEO George Kurtz is a visionary within the data security space, and he’s built his company to have sticking power with customers. As a result, as the security industry consolidates, CrowdStrike is positioned to gain more market share. That process accelerates during economic crises that cause weaker players to drop out of the industry.

Compelling Value Proposition

What’s driving CrowdStrike’s revenue growth right now? Kurtz described the company’s competitive advantage at a Stifel conference in June.

The overarching difference with CrowdStrike is that it seeks to neutralize all threats to a data network. That’s different from classic security plays such as antivirus and malware offerings. Those use signatures to catch specific malicious pieces of code. However, they aren’t a complete solution. CrowdStrike’s artificial intelligence-powered solution seeks to determine whether or not a particular traffic source has bad intentions or not.

How does this play out in practice? Because CrowdStrike’s platform is all-in-one, it’s easier to set up and maintain than the competition. This, in turn, makes for quick financial benefits for customers. At that investor conference, Kurtz described it as follows:

“When you look at the time to value, you’re up and running, no reboots, not a lot of configuration, [CrowdStrike is] a classic SaaS play. And [customers] see the value, and they see the consolidation […] What is the [return on investment] that we can basically present to a customer? Typically 3x to 5x return very quickly. It could be a 3 to 6 months payback. And in today’s challenging financial environment, it’s very compelling.”

Earnings Confirm the Story

And indeed, he’s right – CrowdStrike has a compelling offering. The proof is in the numbers. For Q1, CrowdStrike posted stunning 85% revenue growth, including even hotter 88% recurring revenue growth. It managed to show operating scale as well, as its profit margins tick up.

Overall, it was enough to swing CrowdStrike to an operating profit, whereas analysts had forecast a small EPS loss for the quarter.

The business is growing broadly as well, with CrowdStrike bringing many new customers through the door. It signed up more than 800 net new customers last quarter – that’s a huge figure given that it’s total customer base is still at less than 7,000. Many existing customers also signed up for additional product modules; CrowdStrike was able to use the work-from-home trend to help accelerate product upsell.

CRWD Stock Verdict

It’s no secret that cloud security stocks have been a hit or miss bunch in recent years. Overall, software-as-a-service stocks have done great, but security has been a weak point. That’s primarily because the market is competitive and individual firms have had trouble building a distinct and durable competitive advantage.

In CrowdStrike, we may finally have a company that solved this puzzle. As Kurtz put it, when he looked at security, he saw that there was no Salesforce (NYSE:CRM) for the space – that is to say, a unified all-in-one software platform that sells a wide range of products and services.

When CrowdStrike started out, endpoint cloud security wasn’t a big deal. Now, many companies aim to reach this market. However, CrowdStrike, as the first mover there, has a big advantage in name recognition and securing key customers. In owning CrowdStrike, you’re making a reasonable bet on Kurtz being able to exploit this edge and also find the next big trend in cloud security as it develops.

The sticking point, as with many cloud stocks nowadays, is valuation. CrowdStrike stock has tripled since its March lows. I owned CrowdStrike during that stretch, but I’ve taken profits as I can’t make the short-term valuation pencil out at current prices.

For long-term investors, however, there is still a great story here. Just know that with patience, you can probably get a better entry point.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/crowdstrike-building-the-data-security-cloud/.

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