Pullback in CrowdStrike: Opportunity for Investors

© Reuters. Pullback in CrowdStrike: Opportunity for Investors

CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is a software-as-a-service (SaaS) cybersecurity company that provides cloud-based solutions for endpoint security in the United States and internationally. CrowdStrike is primarily a subscription-based service.

The company was founded in 2011 and went public in June 2019. I am bullish on the stock at this time. (See CrowdStrike stock charts on TipRanks)

Cybersecurity: All-Encompassing Threat

Cybersecurity is taking center stage, as our vulnerabilities continue to be exploited by bad actors. Cyberattacks have targeted hospitals, schools, government agencies and public and private companies alike. A recent summit hosted by the White House indicates just how serious this issue has become. To this end, the President has also stated that the country is at risk of engaging in military action at some point to defend our critical infrastructure from cyber threats.

Ransomware and breaches cost companies billions of dollars each year and the costs are rapidly rising. Companies are realizing that they must invest more heavily in security. It is much more economical and practical to invest in prevention than to try to set things rights after a breach or ransomware attack. Because of this, CrowdStrike predicts its total addressable market will reach $43.6 billion in 2023.

CrowdStrike Earnings: Impressive on Subscription Growth

CrowdStrike runs on a January 31 fiscal year end. As such, Q2 fiscal 2022 is the three months ended July 31, 2021. The company reported over $337M in revenue for this period, including $315.8M in subscription revenue. This is an increase of nearly 70% from the same period in the prior year.

For the fiscal 2022 year, the company is estimated to reach approximately $1.4B in revenues - a 60% increase over the prior year. The company reinvests much of this revenue in sales and marketing in order to secure new customers and further the company's recurring revenue. Therefore, net profitability is still several years off. However, the company is producing positive cash from operations over the last eight quarters and has a strong balance sheet.

It is critical for growth-stage cybersecurity companies to acquire customers efficiently. For Q2, CrowdStrike reported 13,080 subscription customers. This is an 81% gain over Q2 of the prior year.

The SaaS Magic Number is a metric that shows whether a company should continue to invest heavily in sales and marketing. It measures the efficiency and future profitability of the customers being acquired with the sales and marketing spending. A Magic Number over 0.75 is said to indicate that the company should continue to invest in sales and marketing because it is financially prudent and will pay off handily in future periods.

CrowdStrike reported a Magic Number of 1.4 for Q2. This is very impressive. As such, it is wise for the company to continue investing in customer growth. It also shows that management is performing highly effectively in this area.

CrowdStrike Valuation

CrowdStrike stock currently trades at a forward price-to-sales of over 40x. This is not overly high for a company growing at the pace in which CRWD is growing.

The company also has a gross profit margin of around 75%, which is steadily increasing. Because of this, CRWD has a clear path to profitability as it continues to scale.

As of the last report, the company was spending nearly half its revenue on sales and marketing. Once subscription customer growth stabilizes, these costs will normalize and CrowdStrike should be highly profitable. The company's target operating margin is over 20% for the long-term.

Strong Buy Rating from Analysts

Analysts are bullish on CRWD stock. 19 of the 20 analysts reported by TipRanks have a Buy rating on the stock, with one Hold rating. The average analyst CRWD stock price target is $314.90. This implies 22.4% upside from the stock’s September 14, 2021 closing price of $257.30.

Summary on CrowdStrike

In closing, CrowdStrike is an excellent choice in the cybersecurity sector. The company has also capitalized on the work-from-home trend, which is likely to continue for many companies and workers even after the pandemic. CrowdStrike is making significant market share gains through efficient customer growth and has a clear path to producing tremendous profits for shareholders.

Disclosure: At the time of publication, Brad Guichard did not have a position in any of the securities mentioned in this article.

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