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CROWDSTRIKE

April 21, 2024
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FinMeUp
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FinMeUp

Financial analysis on Crowdstrike. Buy/hold/sell?


About

CrowdStrike Holdings, Inc. is an American cybersecurity technology company based in Austin, Texas. Crowdstrikes mission is To protect our customers against breaches. 

Crowdstrike offers 22 different tools that protect customers against breaches, ranging from endpoint security, cloud security, managed services, security and IT operations, threat intelligence, identity protection, log management and crowd XDR.

 

Management

Crowdstrike was founded by George Kurtz in 2011. Kurtz is a cyber security veteran with many years of experience in the space. He is still the founder and CEO today, with a 6.8% stake in the company. Management that has skin in the game is always a positive sign for investors as this provides a direct incentive to drive the company forward.  

Glassdoor statistics show that employees are very happy at the firm. The company has an overall rating of 4.4/5, and Kurtz has a 95% CEO approval rate. 

 

Customer base

[Refer to figure 1]. Crowdstrike has done a phenomenal job at attracting customers ever since this business was launched. As of the most recent quarter, it had more than 17 000 total customers on its platform. Among those customers are some of the biggest in the world, including over half of the fortune 100 and fortune 500, and 15 out of the top 20 U.S banks.

 

Customer stickiness

Getting a customer is already difficult, but keeping a customer is the real challenge. For customer retention and stickiness, we refer to gross and net retention rates. [Refer to figure 2] 

GRR reflects your ability to retain customers. GRR calculates total revenue (excluding expansion) minus revenue churn (contract expirations, cancellations, or downgrades). 

NRR reflects your ability to retain and expand customers. NRR calculates total revenue (including expansion) minus revenue churn (contract expirations, cancellations, or downgrades). The difference between NRR and GRR is that GRR doesnt account for expansion revenue.

Crowdstrikes dollar base NRR has stayed above 120 for a long time, and perhaps more importantly, its GRR continues to get closer to 100 per cent, currently at above 98%. Crowdstrike attracts new customers and convinces them to expend more as indicated by a NRR of 124 in the most recent quarter.

Another metric to determine customer stickiness is to assess the number of products that customers use. [Refer to figures 3] As mentioned before, Crowdstrike has 22 tools (called modules) available for its customers. Of these, 71% use 4 modules or more, 59% use 5 modules or more, 35% use 6 modules or more, and 19% use 7 modules or more. This is once again a testament to the stickiness of Crowdstrikes business. 

 

Technical Analysis

Market structure is always the first variable to assess when looking at price charts. We ideally want to see higher highs and higher lows, or we want to see the price at a strong historical support level. Unfortunately, Crowdstike has recently put in lower highs and lower lows, and it has broken below its medium-term support level. 

For those familiar with technical analysis, it appears as if the share price has completed a head-and-shoulders pattern, as indicated on the graph. [Refer to figure 4]. Head-and-shoulders are trend reversal patterns, which means we can expect the share price to fall significantly if this scenario should play out.

The severity of the price dump is normally measured by the distance between the head and the neckline, which is roughly from $275 to $175. This means that were looking at a fall of about $100, from $165 to $65.

The RSI is somewhat in no-man land at the moment, trending downward in the medium turn but upward in the short-term. It doesnt provide us with much insight regarding overbought and oversold levels. 

 

Financials

Revenue

Since its listing, Crowdstrike's annualized recurring revenue (ARR) growth has been nothing short of spectacular, growing more than 61% in the most recent quarter to nearly $2 billion. [Refer to figure 5]. Revenue growth is slowing down as the company matures, but the overall growth rate of 61% is still very positive. Revenue growth for the last 8 quarters: 84.05%, 85.79%, 74.17%, 70.06%, 69.72%, 63.49%, 62.69%, and 61.09% in the most recent quarter.

Gross margin

Whilst revenue growth is slowing down as the company matures, the gross profit margin has been ever-increasing. Gross margins for the last 5 years: 55%, 66%, 72%, 76%, and 77% in 2022. The company expects to maintain this level for the foreseeable future.

Net income

Being a growth company, operating expenses are always a concern. Growth companies seldomly turn a profit because of the high sales, marketing, and R&D expenses. Crowdstrike is no exception, as it has never turned a net profit in its history. 

In these cases, we often use operating leverage (which is the % of operating expenses relative to revenue) to see if operational efficiency is increasing or not. In Crowdstrikes case, it has been improving. Operating expenses as a percentage of revenue for the last 5 years: 165%, 120%, 101%, 84%, and 83% at FY 2021. This should instil some confidence regarding the future success of the business. 

Buybacks/debt repayment/dividend

Unsurprisingly, Crowdstrike is not focused on giving cash back to shareholders right now. As a growth company, its focused on its own growth and expansion in the short term.

Balance sheet

The balance sheet is solid with no real hidden surprises. The company has low debt levels, whilst assets and FCF are growing. The FCF especially has been growing at a very impressive pace.

 

Valuation

Crowdstrike is currently in its hypergrowth stage, which means that revenue growth is more important than profit growth. For growth companies, we typically consider metrics such as revenue growth, gross profits, and P/S. As the company grows, the operating leverage and P/E ratios will become more relevant. 

P/S and P/GP are currently at 23 and 30 respectively. This is very high when compared to the market at large, but historically its quite low for Crowdstrike itself. 

P/FCF is currently at around 75. Once again, this is very high when compared to the market but fairly low compared to the companys history.

 

Bull-case factors

Industry future: There is a growing demand for cyber security tools around the world and we think this will remain true going forward.

Management: Crowdstrike has a strong management team. The CEO has skin in the game and employees are happy at the firm.

Customers: Crowdstrikes customer base is growing by the minute. The company boasts nearly 17 000 customers, with a GRR of 98%. 

Growth: Growth rates are very impressive. Gross profit is at 77% and operating leverage is improving. The company has not turned a profit yet, but if it continues on its current trajectory it will do so shortly.

 

Bear-case factors

Competition:  the cybersecurity industry is rife with competitors. Crowdstrike is squaring off against companies like Fortinet and Sentinel One

Share dilution: There's a good chance that you're going to be deluded. While this is  not uncommon for fast-growing young tech companies, it is something to be aware of.

Valuation: Even though the share price has decreased significantly since Nov 2021, the valuation metrics still scream overvalued. A great company is not always a great investment it all depends on what the market has priced in, including the excitement levels of investors.

Technical analysis: Technically, things are not looking that great for the share price in the short term. If the head-and-shoulders pattern plays out, we can expect another leg down of about 50%.

Macro environment: The current economic conditions are very fragile. Assets across the board are being hit, especially crypto and tech stocks. We believe the market will continue its downtrend in the short-term as the Fed ramps up monetary tightening.

 

FinMeUp action

Crowdstrike does not appear to be a buy at current price levels. It is, however, a great company with an impressive customer base and retention rates. We will monitor it closely in the coming months and look for a potential entry at lower levels.

Just a friendly reminder - This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only.

 


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