CrowdStrike Valuation: Investor Caution Advised

CrowdStrike (NASDAQ:CRWD) is poised for accelerated commercial growth in 2024 following an impressive performance in 2023. Various CIO surveys indicate an anticipated expansion in IT budgets for 2024, with cybersecurity demand expected to surpass overall software spending. Analysts project a 25% year-over-year increase in CrowdStrike’s topline over the next four quarters, reflecting the company’s ability to generate approximately 36 cents in free cash flow for every incremental sales dollar.

However, despite these positive fundamentals, the stock appears overpriced, trading at 22x EV/Sales and 103x EV/EBIT (projected 2024 Sales and EBIT). Concerns over aggressive valuation multiples cast doubt on the likelihood of CrowdStrike investors achieving significant returns in 2024.

For context, in 2023, CrowdStrike outperformed the broad equities market, including the “Tech” benchmark. Its stock soared approximately 189% over the trailing twelve months, compared to gains of about 20% for the S&P 500 and close to 47% for the Nasdaq 100 (QQQ).

Cybersecurity: Poised for Growth in 2024’s Bull Market

As we approach 2024, the outlook for IT budgets appears promising. Reductions in sales cycles for new clients and faster billing processes for existing ones were highlighted in various Q3 conference talks, favoring cybersecurity investments. The escalating urgency for robust cyber defense mechanisms is driven by increasing geopolitical tensions and security challenges arising from GenAI developments, such as deep-fakes, data poisoning, and adversarial attacks. Notably, Qualys reported a significant increase in disclosed vulnerabilities in 2023, while ransomware attacks surged 72% year-over-year.

The Piper Sandler 2024 CIO Survey presents a bullish perspective for cybersecurity spending, emphasizing the prioritization of security spending by IT budget decision-makers. Survey participants underscored a particular focus on areas closely aligned with CrowdStrike’s expertise, such as Cloud Security, Endpoint Security, Threat Intelligence, and Network Detection & Response.

Structural Growth Supports Long-Term Expansion

The cybersecurity market continues to expand significantly, with the Total Addressable Market topping $188 billion in 2023, projecting double-digit year-over-year growth rates for the next five years. CrowdStrike is strengthening its leadership position as a SaaS security platform, gaining market share within the core endpoint market and expanding beyond endpoint security, notably with LogScale’s integration.

Moreover, CrowdStrike stands to benefit from AI advancements, with the ability to train AI models efficiently and correlate data from different sources, offering a comprehensive view across various segments of a customer’s cybersecurity landscape.

Expect ~30% Year-Over-Year Topline Growth In 2024

Analyst consensus projects ~30% topline growth in 2024, followed by 25% growth in 2025 for CrowdStrike. The company’s ability to generate approximately 36 cents in free cash flow for every incremental sales dollar underpins its robust free cash flow margins.

Reflecting on CrowdStrike’s growth, additional revenue is expected to significantly benefit shareholders. If CrowdStrike grows its revenue to $5 billion by the end of 2025, as estimated by consensus, and maintains a 40% free cash flow margin, the implied forward P/FCF is a notable 35x.

Investor Takeaway

CrowdStrike is set to capture a significant share of the burgeoning cybersecurity demand, with robust growth projections for 2024 and 2025. However, the company’s high valuation multiples raise concerns. Taking both commercial momentum and valuation into account, a Hold recommendation is advised for investors.