How many employees does Crowdstrike

CrowdStrike share: attack on Microsoft & Co

The CrowdStrike share has corrected 20 percent in the past few weeks after its 500 percent price rally last year, but is still rated extremely highly - and for good reason: Sustainable successful digitization is unthinkable without the availability of robust security solutions.

It is therefore no secret that the spending of companies, authorities and consumers on their digital security will increase massively in the coming years. It is therefore obvious that The Digital Leaders Fund should also invest in the leading cyber security companies. But successfully investing in cyber security is difficult because these companies are usually traded at horrendous prices on the financial market.

In our CrowdStrike portrait from September 2020, we presented the company as a premium company at a premium price. At the time, the CrowdStrike share was priced at a good $ 120.

Only 7 months later, almost $ 200 is currently being paid for the CrowdStrike share - even though the price has consolidated by 25 percent in the past few weeks.

It's time for an update with which we want to critically question our CrowdStrike investment.

The current Crowdstrike business figures

CrowdStrike ended Fiscal Year 2021 (FY21) on January 31st with revenues of $ 874 million. That meant a growth of 82 percent (compared to +93 percent in the previous year). The explosive sales growth inevitably flattens out as the company grows. But even in Q4 FY21, a 74 percent increase to $ 265 million was still reported. That's amazing for a company with an ARR (annual recurring revenue) now over $ 1 billion.

In the current Q1 2022, according to official guidance, “only” growth of around 63 percent to around $ 290 million is expected. The initial sales guidance for the full year FY22 is $ 1.32 billion, which would be a growth of “only” 51 percent compared to FY21.

Even if we, like many other CrowdStrike observers, assume that the company will exceed this guidance: Now at the latest it is important to take a close look at the development of the margins when assessing the CrowdStrike share.

A well scalable SaaS business shows increasing margins as soon as sales growth subsides. For our analysis of such a high-growth company as CrowdStrike, it is particularly important to observe the development of gross margin (gross margin) and free cash flow (cash flow taking into account investments).

CrowdStrike's gross margin (TTM) has increased from 69 percent to just under 74 percent over the past 15 months.

The rule of 40 score, which is calculated as the sum of sales growth and the free cash flow margin and describes the efficiency of growth, is an exceptionally high 116 percent (TTM) and has risen significantly again in the past 12 months. This is outstanding, because most growth companies have a Rule of 40 score that also weakens as their sales growth declines.

At CrowdStrike, the free cash flow margin recently increased to almost 37 percent in Q4 2020. That is astonishing given the company's still explosive growth.

Hardly any other SaaS company achieves such fantastic high-growth key figures.

At the end of FY21 on January 31st, CrowdStrike had nearly $ 2 billion in cash. Debt rose to $ 779 million following the issuance of a 3 percent $ 750 million convertible bond in Q4 FY21.

From the antivirus alternative to the dominant platform

CrowdStrike was originally primarily a cloud-based alternative to the aging antivirus software from legacy manufacturers such as McAfee and Symantec. However, there are now around 20 different modules for the CrowdStrike Falcon platform with which customers can solve a wide variety of cyber security challenges.

The company has not only developed into a multi-product company, but CrowdStrike now offers the most comprehensive security cloud platform ever. 63 percent of all customers use at least 4 modules, and 24 percent use 6 or more modules.

The potential of the CrowdStrike share

With the addition of numerous new modules, the TAM (Total Addressable Market) has grown to $ 36.5 billion in recent years. In the next three years, the TAM is expected to grow to over $ 50 billion. Further acquisitions, which regularly increased the TAM in the past, have not yet been taken into account in this estimate.

It currently looks as if CrowdStrike could become one of the dominant players in the highly competitive cyber security market. With a market share of e.g. 20 percent, in this positive scenario, long-term sales of $ 10 billion and free cash flow of $ 4 billion appear realistic for CrowdStrike.

Given a valuation of 25 times free cash flow, an enterprise value greater than $ 100 billion for CrowdStrike would be quite conceivable. Today the enterprise value is around $ 40 billion.

In a positive scenario based on today's valuation, the CrowdStrike share would still have long-term potential despite an EV / sales ratio of 30 (forward, i.e. based on the numbers expected for the current FY).

Doomed to grow

However, CrowdStrike management is under tremendous pressure to reasonably maintain sales growth. Even after the recent consolidation of the CrowdStrike share, the extremely high valuation can only be justified if the ARR growth is over 40 percent p.a. for several years.

How can that be done?

As a reminder: the increase in the ARR is calculated from the ARR of the new customers plus the additional ARR of the existing customers (upsell) minus the ARR of the lost customers (churn) or in short:

Net New ARR =

New Customers ARR + Expansion ARR from existing customers - Churned ARR.

The Net New ARR on CrowdStrike was $ 143 million in Q4 FY21. The necessary growth cannot be achieved with new customers alone. Even if the record number of 1,480 new customers in Q4 shows that the growth in new customers is still more than intact.

That means that in the future you have to attach more and more importance to generating even more sales with existing customers. The net retention rate is a good 125 percent, i.e. a 25 percent growth was recently achieved with existing customers.

A further increase in the expansion of existing customers requires constant new products and expansion into new niches of the cyber security market. This is likely to be the reason for the extremely aggressive acquisition strategy at CrowdStrike.

Acquisition of Humio and Preempt

At the beginning of the new fiscal year in February, CrowdStrike announced the acquisition of Humio for approximately $ 400 million. The company is thus expanding into the observability and log management segment. In any case, $ 400 million is a proud price for a start-up founded only 5 years ago in Denmark with fewer than 100 employees.

Why is CrowdStrike paying such a strategic price?

The magic word is XDR - Extended Detection and Response and stands for the discovery and automated elimination of threats and security gaps. With its technology, Humio offers the analysis of large unstructured data volumes from log files at high speed. With this solution, CrowdStrike is now competing directly against the top dog Splunk and our portfolio value Elastic and Datadog.

Compared to the Humio acquisition, the Preempt acquisition last September for just under $ 100 million was a real bargain. The Preempt technology around the fight against identity-based attacks ensured that CrowdStrike is now also in competition with Okta.

The open criticism of Microsoft after the cyberattacks on several US authorities via the SolarWinds software shows how self-confident the CrowdStrike management is now. CrowdsStrike CEO Georg Kurtz: "The threat actor took advantage of systemic weaknesses in the Windows authentication architecture, allowing it to move laterally within the network as well as between the network and the cloud by creating false credentials impersonating legitimate users and bypassing multifactor authentication."

It is easy to see that CrowdStrike has the confidence to compete with its platform against a wide variety of security specialists in their respective niches. In the coming years it will be exciting to see whether the company actually succeeds in successfully challenging established market leaders such as Splunk and Okta in their specialist areas.

Conclusion

CrowdStrike is currently one of the most attractive SaaS companies on the planet. But premium prices have been paid for some time for this premium company, which anticipate a lot of positive news for the coming years.

For us, the CrowdStrike share is currently still too expensive to take a larger position, even after a 25 percent correction. However, we want to stay invested and intend to expand our currently small position in due course and with a better risk / reward ratio. Because the profit lies in the purchase price when investing in the Security Leaders. In the case of CrowdStrike, that doesn't seem particularly attractive to us at the moment.
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Disclaimer

The Digital Leaders Fund and / or the author and / or affiliates or companies own shares in Crowdstrike. This post represents an expression of opinion and not investment advice. Please note the legal notices.