Investors who’re just hearing about the cloud-based cybersecurity software company for the first time are likely wondering whether it’s got the stuff to keep moving higher or will it fall back into double digits.
Is it a $50 stock or a $150 stock? I believe it’s the latter.
CRWD Stock is Worth $150 or More
As I write this, CrowdStrike stock is up 107% on a year-to-date basis, with almost half of those gains have come in the last three months due to the overall recovery of the markets along with a movement by investors to cloud-based tech stocks.
CRWD stock is trading at $103. For it to get to $150 by the end of the year, it’s got to move higher by an additional 46%. That seems easy enough.
InvestorPlace’s Charles Sizemore recently highlighted the speed at which the endpoint security firm has grown revenues in recent years. A quick look at its IPO prospectus shows that the company’s annual revenue has grown from $52.7 million in fiscal 2017 (year ended Jan. 31, 2017) to $118.8 million in 2018 to $249.8 million in 2019 to $481.4 million in 2020.
That’s a three-year compound annual growth rate of 109%.
For those unfamiliar with the rule of 72, it’s the number of years that a stock takes to double based on a given annual rate of return. If your annual rate of return were 109% over three years, it would take that stock approximately eight months to double [72 divided by 109] in value.
Relating this to CrowdStrike’s revenues, they’ve doubled every eight months or so over the past 36 months. That’s almost five turns of its sales over this period. By any standard, it’s a tremendous growth rate.
CrowdStrike Doesn’t Make Money
In addition to talking about its revenue growth, Sizemore reminded readers that CrowdStrike doesn’t make money.
“The bad news is that the company isn’t profitable. It hasn’t had a single profitable quarter in its entire history as a company, or at least not on a GAAP basis. The losses are getting smaller – just $0.09 last quarter – and it’s worth noting that the losses are mostly due to high marketing costs, which should presumably help to generate future growth. But as of today, the company has yet to actually make money.”
I’m a big believer in investing in profitable companies, so the fact that it doesn’t make money is a concern. However, if you consider why it hasn’t made money over the past four fiscal years, I think the pathway to profitability becomes more apparent.
Between 2017 and 2020, CrowdStrike’s sales and marketing expenses increased by 396%, research and development costs rose 233%, and general and administrative rose 443%.
Those are significant increases; I’ll grant you. However, as a percentage of revenue, they’ve all fallen dramatically. For example, the company’s sales and marketing expenses in 2020 were 55.4% of revenue. In 2017, they were 101.9% of revenue.
Overall, its total operating expenses have gone from 207.4% of revenue in 2017, to 100.9% in 2020. At the same time, its operating expenses increased by 344.6% while its operating loss increased by just 61.3%.
Quite simply, CrowdStrike today is much stronger financially than it was in 2017.
The Bottom Line on CrowdStrike
I recently highlighted seven hot stocks that were likely to stay hot. CrowdStrike was one of them. I argued that over 27 months, the company was able to take its annualized free cash flow from -$90 million to $120 million, a 233% turnaround in that time.
In the company’s most recent quarter, it reported free cash flow of $87 million, a 640% improvement. If there’s one thing I love to see, it’s free cash flow growth.
Given the trend appears to be moving in the right direction, I could see it making money with approximately $1 billion in sales, a level it should hit within 24 months.
You better believe it’s a $150 stock. And don’t be surprised if it hits $500 within three to five years from now.
CRWD stock is a winner.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.