Many businesses are beginning to control their spending to weather future headwinds in the economy. However, cybersecurity is one area where they cannot afford to cut spending. In 2021, the average cost of a data breach was over $4 million per incident, a cost that could cripple many businesses.

Cybersecurity improvements are needed, with cybercrime expected to increase over the next decade, regardless of economic conditions. My top pick in this space is CrowdStrike (CRWD 1.22%), and unsurprisingly, it just reported an explosive quarter that included an increase in forecasts. Still, the stock is down more than 40% from its all-time high. Does the market know something we don’t? Or is this stock a crying buy?

Image source: Getty Images.

CrowdStrike’s platform has become a no-brainer for businesses to adopt

Unlike traditional security vendors, CrowdStrike’s software was designed as a cloud-first solution. Because it’s cloud-based, new customers can quickly deploy the lightweight program to endpoints (like laptops or phones) on its network. Using artificial intelligence, CrowdStrike analyzes billions of signals every week to determine what constitutes regular activity, an anomaly, or a real threat. After identifying a threat, CrowdStrike can shut down that access point and alert IT of a possible breach.

This solution has taken the security world by storm and CrowdStrike has grown its number of customers from 1,242 in January 2018 to 17,945 in April 2022. Along the way, it has captured 15 of the top 20 US banks and 65 of the Fortune 100.

Customers who adopt the CrowdStrike platform also spend more over their lifetime, as its net retention rate was 124% for the quarter, meaning existing customers spent $1.24 for every 1, $00 spent last year. This expansion is primarily driven by customers adopting more modules from CrowdStrike. The functionality of CrowdStrike’s core platform can be increased by adopting more modules (CrowdStrike currently has 22 different modules), unlocking greater security or data access.

Percentage of customers using multiple modules
Time range Four or more modules five or more six or more
Q1 2022 64% 50% 27%
Q1 2023 71% 59% 35%

Data source: CrowdStrike. CrowdStrike’s fiscal year (FY) first quarter ends on April 30.

Otherwise, Forrester Research found that adopting CrowdStrike’s security solution resulted in a 403% ROI, with an ROI of less than three months over a three-year period.

CrowdStrike’s platform is trusted by its customers and independently verified to deliver substantial value. However, is the stock worth buying?

CrowdStrike raises tips while others lower theirs

For its first quarter of fiscal 2023 (ending April 30, 2022), CrowdStrike reported that its annual recurring revenue increased 61% to $1.9 billion. Additionally, it generated free cash flow of $157.5 million, representing a margin of 32%.

These strong results were overshadowed by CrowdStrike’s increased forecast as many companies cut their outlook. For fiscal 2023, CrowdStrike raised its revenue projections by 2.3% and its non-GAAP earnings per share by 17%. This increase demonstrates how much more robust CrowdStrike is getting as others get weaker – a huge competitive advantage.

However, CrowdStrike’s stock is still expensive. Even though its valuation is markedly different from its highs, a price-to-sales ratio near 25 is by no means cheap.

Graph of CRWD Price to Free Cash Flow

CRWD Price to Free Cash Flow data by YCharts

While valuation is a risk investors should understand, they should also consider CrowdStrike’s vast market opportunity. With future product launches, CrowdStrike expects to tap into a $126 billion market opportunity by 2025. Because it has an industry-leading product in a huge market, CrowdStrike shares will always have a higher valuation, unless they lose their leading position.

CrowdStrike’s massive market, fantastic customer retention, and free cash flow make the company a great investment. Although the valuation is a bit of a concern. But if you hold the stock with a multi-year time frame in mind, valuation becomes less of a problem.

I think CrowdStrike is a bargain at these prices, but it could be affected by further selling in the market. With CrowdStrike’s business unaffected by the current economic environment, investors should buy the stock today with the mindset of holding it for at least three to five years.


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