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CrowdStrike: Stronger Than Ever

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Introduction and Investment Thesis

In recent financial news, CrowdStrike (NASDAQ:CRWD) has emerged as a leader in the modern endpoint security market. With a comprehensive suite of products and a track record of strong performance since its IPO in June 2019, the company is well-positioned for continued growth, despite a recent slowdown in net new ARR. However, positive trends in the IT security market and increasing consolidation deals suggest that the company may be on the cusp of a turnaround. With improving margins and an undervalued stock, CrowdStrike presents a compelling long-term investment opportunity.

Q2 Earnings and Signs of a Turnaround

CrowdStrike recently released its Q2 FY24 earnings, which showed strong quarterly revenue growth of approximately 37% year over year. While this beat analysts’ estimates only by a small margin, the company’s Q3 FY24 revenue guidance aligns with expectations. However, concerns arise from a slowdown in annual recurring revenue (ARR) growth, particularly in net new ARR, which has declined for two consecutive quarters. This decline can be attributed to longer sales cycles and delayed subscription start dates. Despite these challenges, management remains optimistic, citing increased momentum, a growing customer pipeline, and changes in the competitive landscape. Based on these factors, the company expects double-digit net new ARR growth in the second half of the year.

Emerging Modules as Growth Drivers

An important driver of future growth for CrowdStrike lies in its emerging modules, namely Cloud Security, Identity Security, and LogScale. These modules have shown significant growth, contributing to approximately 20% of total ARR in Q2 FY24. Cloud Security, the largest contributor, achieved nearly $300 million in ARR, while Identity Security and LogScale have also experienced rapid growth. As adoption rates increase, these modules are expected to become the main drivers of growth for the company. With their potential for multiyear hypergrowth and a total addressable market (TAM) of approximately $64 billion, CrowdStrike is well-positioned to capitalize on these opportunities.

Rock Solid Margin Profile

In addition to its growth prospects, CrowdStrike has reached a significant milestone in its margin profile. The company achieved GAAP profitability for the second consecutive quarter and surpassed its long-term operating margin target of 20-22% for the first time. With the potential for further margin improvement through decreasing hosting costs and increasing economies of scale, CrowdStrike is poised for continued success. These positive trends in margins, coupled with the company’s ambitious targets for the next 3-5 years, indicate strong future profitability and a promising investment opportunity.

Conservative Valuation Despite Strong Fundamentals

Despite its strong performance and growth prospects, CrowdStrike remains undervalued in the market. With a market cap of $38 billion and expected FY24 sales of over $3 billion, the company’s Price/Sales ratio stands at approximately 12.6. However, assuming an average revenue growth rate of 30% over the next 3 years, the multiple could decrease to around 5.7, indicating potential for significant upside in the stock price. Based on this analysis and the company’s improving fundamentals, CrowdStrike shares have the potential for significant appreciation in the coming years.

Competition from Microsoft

One key risk for CrowdStrike is increased competition from Microsoft in the endpoint security space. Microsoft Defender has gained traction among price-sensitive customers, resulting in Microsoft overtaking CrowdStrike in market share. While this competition presents a potential threat, CrowdStrike’s increasing average selling prices indicate that customers are willing to pay for the added value it offers. Additionally, no other competitors pose a significant challenge at this time. However, ongoing competition with Microsoft and the possibility of a pricing war should be monitored closely.

Conclusion

CrowdStrike’s strong performance, emerging growth drivers, improving margin profile, and conservative valuation make it an attractive investment opportunity. Despite challenges from competitors, the company’s innovative solutions and customer demand position it for continued success. With its stock undervalued relative to its fundamental performance, CrowdStrike presents an attractive long-term investment option for investors.

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