$CrowdStrike Holdings, Inc.(CRWD)$ $Nasdaq100 Bull 3X ETF(TQQQ)$
One of the sectors I favoured in 2023 was Cybersecurity, from which I gained substantial profits using passive ETF such as CIBR and investing in individual stocks such as ZS, NET, and CRWD.
Currently, while CrowdStrike (“CRWD”) appears costly at first glance, its trading valuation aligns reasonably well with similar companies when considering growth factors. CRWD is quite likely to experience a significant increase over the next few years due to its growth potential and strong fundamentals.
Reacceleration of Endpoint security demand
CrowdStrike continues to hold a strong position among cloud-native vendors in capturing Endpoint market share. Recent IDC data indicates that CRWD has consistently surpassed its core Endpoint competitors, marking a gain of 290 basis points in market share last year.
Moreover, there are ample opportunity for CRWD for further market share gain, considering significant market share still held by outdated vendors such as McAfee (Trellix) and Symantec (Broadcom), who continue to lose ground. Despite CrowdStrike's substantial growth in recent years, it accounted for just 17.8% of the market at the time of IDC's analysis. An acceleration in the migration away from legacy antivirus solutions is very likely in 2024 due to escalating threats and notable high-cost attacks (Clorox, MGM, Caesars, etc.), which have raised awareness and driven demand substantially higher for next-gen technologies that secure critical enterprise attack surfaces against adversaries.
Microsoft’s threat is not a big concern at all
Microsoft's advancements in developing its Security platform are definitely strong, surpassing the milestones of $20 billion in revenue and $4 billion in R&D investment last year. However, it is crucial to know that while Microsoft holds a substantial share, enterprises frequently opt for standalone Endpoint vendors alongside Microsoft, making their market share non-exclusive.
The extensive reach and telemetry of Microsoft's endpoint infrastructure might be perceived as a competitive edge. Yet, this scale presents a double-edged sword, as Microsoft also remains a significant source of vulnerabilities, making its ecosystem a prime target for adversaries in the industry. This situation can create the perception that customers are essentially paying Microsoft to safeguard them from vulnerabilities within its platform.
Moreover, industry discussions suggest that managing MSFT's platform might entail higher costs than initially realized by customers. Many enterprises are wary of vendor lock-in and often require protection against threats beyond the Microsoft environment (Mac, Linux, etc.), where alternative vendors could offer more effective solutions.
Well-positioned for Cloud security penetration
As the industry's focus on Cloud security intensifies, CRWD has been gaining significant traction. CrowdStrike's expansion into cloud workload protection aligns seamlessly with industry trends, including substantial deals that replace multiple vendors.
The market increasingly values security solutions that center on workloads, offering distinct protective measures in contemporary hybrid and multi-cloud data frameworks. These solutions promise consistent visibility and control across physical and virtual machines, containers, and serverless workloads. CrowdStrike's array of offerings, encompassing CSPM & CIEM, CWP, and ASPM, provides a comprehensive risk overview. With the continuous evolution of technology and cloud adoption expanding attack surfaces, complexity, and unprecedented threat levels, CRWD's cloud security business is anticipated to continue surpassing the growth of core Endpoint solutions.
Strong operational leverage supports margin expansion!
The supplementary modules within CRWD's platform boast significant contribution to gross margins, and it is anticipated that continuous progress in attachment rates will fuel further expansion of gross margins in the years to come. Moreover, as data gets integrated throughout the platform, its utilization for various purposes incurs minimal additional costs. In FY24, CrowdStrike has achieved incremental gross margins exceeding 80%, indicating a trajectory toward sustaining gross margins of 80% or higher.
Looking forward, the robust attachment rates, increased scalability, and growth in new clientele will be key drivers in the ongoing expansion of incremental margins.
Conclusion: my top pick in cybersecurity sector!
CRWD maintains a leading position among platforms and is poised to capitalize on the continuous demand in the Security Software sector, particularly benefiting from ongoing Endpoint and emerging product growth. Its integration with lightweight agents across its user base, cloud-native structure, leveraging network effects through AI-based data and analytics technology, and exceptional market penetration efficiency set CRWD apart.
With high incremental gross margins and exceptional unit economics, CRWD exhibits one of the most promising prospects for operating and cash flow margins among the cybersecurity platforms. This potential for margin improvement seems to be undervalued and could be the catalyst to strong profitable growth in 2024.
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