Sept 3 2020 - CRWD Another Step Closer To Become The Leader In Cybersecurity

Summary

CrowdStrike reported excellent Q2’2021 results, continued its rapid growth, and once again generating cash and posting a massive improvement in profitability.

Signs of economies of scale and sustainability are now crystal clear.

Coupled with a 10% CAGR of the total addressable market, CrowdStrike deserves to trade at a premium at 36x EV/Sales.

Investment thesis

CrowdStrike (CRWD) reported excellent results. The market was disappointed with the Q3’s prospect of slower growth, but we beg to differ. The company had almost doubled the number of clients, succeeded in offering more value as existing customers continue to spend more, and finally posting impressive growth in operating margin and free cash flow.

Despite the disappointment in the market, -15% at pre-trading. We are happy to hold on to CrowdStrike.

CrowdStrike’s solution is superior and essential

CrowdStrike

Source Q2’2021 presentation slides

CrowdStrike wants to be the leader in endpoint security. The product is superior to competitors such as Symantec or MacAfee due to its AI’s ability to learn whenever a customer suffers a security breach, creating a positive network effect that improves the system for all users.

CrowdStrike Threat Graph

The above slide explains how it works. As soon as a threat breaches a system, the Threat Graph immediately analyzes the breach and reports an update to all other CrowdStrike customers, giving them real-time protection and community immunity to further breaches of this type.

The CEO, George Kurtz, explains why CrowdStrike’s solution on the top of the list even in the most challenging times.

[…] First, even in this challenging macroeconomic backdrop, cybersecurity is mission-critical and more important now than ever, as the threat environment escalates and the attack surface continues to grow

[…] many of the security leaders we spoke with believe that experiencing a breach now, while their business is under extreme stress due to the impact of COVID, would be far more detrimental to their business versus last year.

Second, to secure the hybrid workforce in today’s threat landscape, the two most important aspects of security are providing visibility and protection to workloads and implementing a zero trust architecture, which endpoint security is an important foundational element.

[…] CIOs w ant cloud platforms that are agile, easy to deploy, easy to manage, even if their security teams are working remotely.

Outstanding Q2’2021 results

There is a lot to like about CrowdStrike’s Q2 performance.

First, the company generates 93% of its revenue from a SaaS subscription-based revenue model. Impressively, this portion almost doubled in Q2, increased by 87% YoY.

The growth is mostly driven by a rapidly expanding customer base, up 91% YoY. Today, half of the Fortune 100 are customers of CrowdStrike

CrowdStrike achieves such a meteoric rise by following a low-friction go-to-market strategy. The company utilizes a mix of direct sales and channel partners and is targeting all types of businesses globally.

And customers are happy with the product. In Q2, CrowdStrike sees more and more companies subscribe to multiple modules, with 57% subscribers using four or more.

CrowdStrike doesn’t disclose the precise number, but existing customers are happy to pay more as dollar-based retention rates exceeded 120% again.

A clear sign of economies of scale

The most impressive part of the results was the improvement in operating margin. The company managed to reduce SG&A and R&D at a rapid pace. Q2’2021 saw a positive operating margin for the first time, +4% vs. -46% in FY2019.

The outstanding performance also translates to free cash flow of M, or 4%, marking a full 12 months of generating cash flow.

We are bullish on CrowdStrike even at the current high multiple of 36x EV/Sales. We believe that they will be able to execute expertly and achieve their long-term targets. The Q2 results have shown that these targets are already within reach.

Conclusion

In conclusion, CrowdStrike reported outstanding results. Yes, the Q3 outlook shows a slowdown in revenue and perhaps retention, but at 70% growth for FY2021, more robust profitability and cash generation, coupled with an expanding TAM of 10% CAGR, we believe this is a steal at 36x EV/Sales in a few years.

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