CrowdStrike: Growth Beyond Endpoint Security; Initiate With "Buy"

Seekingalpha03-07

SummaryCrowdStrike Holdings, Inc. is utilizing their unified Falcon Platform to deliver cloud-based security features, experiencing strong growth momentum in the new cloud landscape.Their integrated ...

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Jmw148
03-07
Jmw148
Future looks promising 😀

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CrowdStrike has been demonstrating strong growth momentum in the new cloud landscape. I initiate with a \"Buy\" Rating with a fair value of $450 per share.One Console, One Agent, Multiple ModelsAs CrowdStrike was founded in 2011, their technology platform embraces cutting-edge cloud based infrastructure, and their Falcon platform is built for one console, one agent with multiple models. These models can address endpoint, cloud, identity, SIEM, and data protections needs across enterprises of varying scales, as illustrated in the slide below.CrowdStrike Investor PresentationCrowdStrike has experienced explosive business growth in recent years, with continued margin expansion as evidenced in the table below. There are several growth drivers for their growth.CrowdStrike historical growthFirstly, their unified platform with multiple modules structure would reduce the operational complexity and costs for enterprises. Presently, CrowdStrike offers 27 distinct models under their Falcon platform, allowing customers to select their preferred models for purchase. Moreover, the entire platform is cloud-based; consequently, customers only need to face one vendor and one platform.Secondly, CrowdStrike’s core endpoint is a market leader, and it has been ranked #1 out of 26 vendors in IDC’s endpoint security market share report, as communicated by CrowdStrike. Fortune Business Insights forecasts the endpoint security market size to grow from $13.6 billion in 2023 to $25.7 billion in 2030, exhibiting a CAGR of 9.5%. CrowdStrike’s unified platform provides them a significant advantage in competing against other standalone endpoint software vendors.Lastly, CrowdStrike has been expanding their offerings beyond endpoint security, with notable growth observed in the identity and cloud security. In Q4 FY24, their identity protection business has surpassed $300 million in annual recurring revenue (ARR), more than doubling year-over-year. In addition, CrowdStrike and Palo Alto Networks (PANW) are the two main vendors for cloud security. CrowdStrike has been building their cloud security with a primary focus on data. As disclosed over the earnings call, their cloud security business has been accelerated, with net new ARR growing nearly 200% year-over-year growth. Currently, they have more than $400 million in ARR.In short, CrowdStrike’s integrated Falcon platform serves as the driving force behind the company’s phenomenal growth.Historical Financial AnalysisThe following table examines the company’s key financials from FY21 to FY24. Their revenue growth, free cash conversion and margin expansion are outstanding. Notably, the free cash flow margin achieved 30.8% in FY24 thanks to their subscription business model. They generated $2.4 billion free cash flow in total from FY21 to FY24 and spent $757 million in acquisition without any dividend and shares repurchase, quite typical for an early-stage/high growth tech firm.CrowdStrike historical metricsThey have a resilient balance sheet, with $3.47 billion in cash and cash equivalents at the end of Q4 FY24. Their margin expansion is quite respectful, evidenced by 21.6% of adjusted operating margin in FY24. As the company’s products are module-based, the incremental costs for additional module are almost marginal for CrowdStrike, and most subscription income would drop to the bottom line, which generates tremendous operating leverage for the firm. During the latest earnings call, their management expressed strong confidence in their ability to drive future margin expansion over the forthcoming years.Acquisition AnalysisAs previously noted, CrowdStrike allocated a portion of their free cash flow toward acquisitions. In November 2021, they completed the acquisition of SecureCircle, a SaaS-based cybersecurity service company. The deal bolstered CrowdStrike’s data protection module and enhanced their data collections from endpoint.In 2023, they announced plans to acquire Bionic, the pioneer of Application Security Posture Management. Subsequently, these acquired features have been seamlessly integrated into their Falcon platform.On March 5th, 2024, CrowdStrike announced to acquire Flow Security, the industry’s first and only cloud data runtime security solution. As highlighted in the earnings call, the management expressed Flow Security would enhance the data protection module, and furnish CrowdStrike with a distinctive competitive edge over legacy data leakage prevention systems.In summary, I appreciate their tuck-in acquisition deals, whereby these individual SaaS services are seamlessly integrated into the unified Falcon Security Platform.Recent Results And OutlookCrowdStrike reported their Q4 FY24 result on March 5th after market close. My biggest observation for the quarter is the strong ARR growth, as indicated in the table below. They achieved record net new ARR of $282 million, growing 27% year-over-year. As mentioned earlier, the ARR growth has propelled by the adoption of cloud security, identity and endpoint solutions.CrowdStrike Quarterly ResultsThey are guiding 30%-31% of revenue growth for FY25 and expecting free cash flow margin to be 31%-33%. They continue to target $10 billion of ARR over the next few years.CrowdStrike GuidanceCrowdStrike Investor PresentationTheir guidance appears to be reasonable and realistic to me. They ended up the quarter with $3.44 billion of ARR, and their net dollar retention rate was around 120%; therefore, the existing business has the potential to achieve $3.65 billion in revenue for FY25 assuming all the renewals will occur in the middle of FY25. CrowdStrike only needs to generate $300 million additional revenue from new customer acquisitions, or the new module purchases from existing customers.During the earnings call, their management emphasized their capability for cross-selling. More specifically, deals with eight or more modules doubled year-over-year. In addition, they closed more than 250 deals greater than $1 million in Q4 alone. Given these factors, FY25 appears poised for yet another year of growth for CrowdStrike.Valuation EstimatesThe model’s assumptions for FY25 align with the company’s guidance, and as discussed above, it is quite achievable in my opinion. As they are spending more than 20% of revenue towards SBC without any shares repurchase, I estimate that their shares outstanding will grow 2.5% year-over-year.Their operating margin would be predominantly fueled by operating leverage, as their additional module sales could flow directly to the bottom of their P&L. I calculate that their operating expense growth would be 4%-5% lower than their topline growth. The operating margin is projected to reach 30.9% by FY34, a quite reasonable level compared to other SaaS companies.For CrowdStrike Holdings' normalized growth, I project their growth rate gradually moderate as they scale up their business. Fortune Business Insights forecasts the global cybersecurity market to grow 13.8% CAGR during 2023-2030. Considering CrowdStrike has been gaining tremendous market share from legacy cybersecurity vendors, I view the growth assumptions in the model as quite conservative.The model utilizes 10% discount rate, a consistent rate I apply across all my models. The terminal growth is set to be 4%, slightly higher than the global GDP growth. With these parameters, the fair value is calculated to be $450 per share. The stock price is trading at 50x FY26’s free cash flow.CrowdStrike DCF - Author's CalculationsKey RisksPatent Infringement: In March 2022, Webroot and Open Text (OTEX) filed a lawsuit against CrowdStrike, alleging infringement on six patents, as disclosed in FY23 10Ks. The lawsuit outcome remains pending, and it is uncertain whether it could potentially impact the distribution of CrowdStrike’s certain modules in the future.Small Business Exposure: CrowdStrike doesn’t disclose their revenue exposure to small customers; however, I anticipate it is not a small percentage, as CrowdStrike’s subscription model is quite affordable for small customers. Any economic challenges would impact small businesses first, potentially posing threats to CrowdStrike’s growth.High Stock-based Compensation: As mentioned, CrowdStrike is spending more than 20% of total revenues on SBC, a quite high level compared to other software companies. I’ll continue to monitor their SBC spending in the coming years.VerdictCrowdStrike Holdings, Inc. is firing on all cylinders, expanding security services to fast-growth areas such as identity, cloud security and data protections. I anticipate the company will continue to gain market shares from legacy players. 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