3 Things About CrowdStrike That Smart Investors Know – The Motley Fool
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The cybersecurity market is growing fast and becoming more important to companies with each passing year. Revenue generated by this industry is projected to surpass $146 billion in 2022 and grow to $212 billion by 2026. For investors looking to capitalize on this secular trend, there are plenty of choices.
One that stands out is CrowdStrike (CRWD -4.25%). By developing the first cloud-native cybersecurity platform, CrowdStrike has expanded rapidly and become a leader in the industry. It has grown its revenue in every quarter as a public company, but let’s take a look at some other things smart investors know about the business.
Image source: Getty Images.
CrowdStrike makes the majority of its money selling subscriptions to its cybersecurity products. The key to this business model is growing the subscriber count and getting them to spend more with the company over time. In the fiscal 2023 first quarter, CrowdStrike reported 17,945 total subscribers, good for a 57% year-over-year increase.
These subscribers also are also increasing their spend by adding on more of CrowdStrike’s products (modules).
Metric
Q1 2023
Q1 2022
Customers that have adopted 4 or more modules
71%
64%
Customers that have adopted 5 or more modules
59%
50%
Customers that have adopted 6 or more modules
35%
27%
Data source: CrowdStrike.
In the earnings call, management said so many customers are adopting four or more modules they’re going to stop reporting it. Instead, they will begin reporting the percentage of customers that have adopted seven or more modules. For the most recent quarter, this came out to 19%.
Customers adopting more modules sends a clear signal that they’re happy with CrowdStrike’s products and see the value in purchasing more.
Like many companies in their hyper-growth phase, CrowdStrike is unprofitable as it makes the conscious decision to reinvest its cash back into the business. However, CrowdStrike does generate consistent operating cash and free cash flow.
Data by YCharts.
In the fiscal first quarter, CrowdStrike generated about $158 million in free cash flow, which translates to a free-cash-flow margin of 32%. Put another way, the company turns 32 cents of every dollar of revenue into cash. This quarter also represented the eighth quarter out of the last ten where the free-cash-flow margin was 30% or greater.
This is an important factor for investors to consider. Consistent, positive free cash flow means CrowdStrike does not need to seek out debt or issue more shares in order to fund the growth of its business.
Subscription businesses eventually need to show that economies of scale can start to generate profits, and CrowdStrike is taking steps in that direction. On a GAAP basis, the net loss in the latest quarter was $30 million, an improvement from the $83 million loss in the prior-year period. On a non-GAAP basis, which removes the impact of stock-based compensation and some amortization, the company posted net income of $75 million, up 221% year over year.
Helping contribute to this improvement is CrowdStrike’s ability to manage its operating expenses. As a percentage of overall revenue, operating expenses for the quarter were 78.9%, down from 84.4% in the same period last year.
It’s clear CrowdStrike has a lot going for it right now. It’s in a growing and increasingly important industry; it’s growing the subscriber base and increasing their spending; and it’s generating cash and moving toward profitability.
The stock currently trades for 25 times sales, which is quite a premium to pay for any company. However, this multiple is down significantly from its high of 66 in early 2021. So while the valuation is far from its peak levels, investors are still paying up for quality. Considering all that CrowdStrike has going for it, that might still be the smart decision.
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