by Ian Harvey
October 01, 2019
Cybersecurity is a fast-growing niche within the technology universe. Researcher Global Market Insights thinks the industry will grow an average of 12% every year through 2024 with spending topping $300 billion worldwide by that time. Multiple developments like the Internet of Things and cloud computing are rapidly changing business operations, which in turn necessitates new data risk management practices.
That’s where cloud-based endpoint cybersecurity company Crowdstrike Holdings Inc (NASDAQ: CRWD) comes in; and one of the largest “pure play” cybersecurity public offerings by market capitalization on record. About a month after its debut in June 2019, the stock is trading at more than double its initial pricing of $34 a share.
In 2018, CrowdStrike’s total revenue increased 110% over 2017 to $250 million. That was much greater than the average industry growth rate, including some of its immediate competitors like BlackBerry’s Cylance and Carbon Black. Besides adding hundreds of new customers last year, CrowdStrike also reported that its dollar-based net retention rate was 147% -- implying that existing customers spent an average of almost 50% more on CrowdStrike's security offering than the year prior.
YOU NEED TO BE IN TO PROFIT!
In less than eight years, CrowdStrike went from little more than an idea to a $12 billion enterprise trading on the Nasdaq.
Going public on June 12 , CrowdStrike immediately booked a 70% gain in its stock, then proceeded to rocket to nearly $80 a share in subsequent days (a 135% gain from its $34 offer price), before falling back to a recent price of about $70 -- still easily a double.
The start-up (it was founded in 2011) took a new approach to security, building a platform for the cloud computing era. As remote operations increase, the need to keep "endpoints" (employee computers and smartphones, servers, and other network-connected equipment) safe is on the rise as well. As the company explains, CrowdStrike's software protects all of those endpoints and "benefits from crowdsourcing and economies of scale, which we believe enables our AI (artificial intelligence) algorithms to be uniquely effective." Put simply, the more users on CrowdSource's platform, the better it gets at protecting everyone.
CrowdStrike is led by co-founder and CEO George Kurtz, who compares the firm to other companies in different software sectors like Salesforce.com Inc. and Workday Inc... Companies at the top are benefiting from a rapid transition from on-premise data centers to the cloud.
CrowdStrike sells its software-as-a-subscription to organizations of all sizes and sells a different level of service depending on an organization's size and complexity. The company's growth strategy is to replace one aspect of an organization's cybersecurity software and then upsell the customer on using more CrowdStrike software.
This "land and expand" strategy has been working. Last year, pre-existing customers net grew their spending on average by 47%.
Gross profit margins have been expanding and hit a healthy 65% level last year. It's quite possible that as the company continues to grow its revenue, it will achieve levels of scale that will enable it to become profitable -- but when that will happen is hard to determine right now.
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Analysts Take on CrowdStrike…..
Twelve analysts have given a buy rating to the company’s stock. The stock has an average rating of “Buy” and a consensus target price of $86.79.
Bank of America Merrill Lynch analyst Tal Liani expects the cloud-based software company, which jumped more than 70% on its first day of trading, to see its total addressable market triple to over $20 billion in the coming years.
CrowdStrike is "the premier brand" in cybersecurity, operating in a market "ripe for disruption" and offering technology that is difficult for its competitors to duplicate, says JMP Securities.
CrowdStrike is "positioned well to ... expand from core detection and response capabilities to adjacent areas such as IT hygiene, vulnerability management, and more," according to Merrill Lynch.
“We believe CrowdStrike's innovative technology which layers on [artificial intelligence/machine learning] to crowdsourced threat intelligence to stay ahead of the adversaries is superior to its competitors." Oppenheimer analyst Shaul Eyal wrote. "Our belief is CrowdStrike to displace and replace competitors' solutions, and to take market shares from legacy and next-gen antivirus vendors."
Oppenheimer set a $90-per-share price target on CrowdStrike shares.
Make that 30% -- or better. Also initiating coverage of CrowdStrike with a buy rating, Needham & Co. believes that the company has the potential to grow at a "sustainable" rate of 50% to 100% over the next three years, while "sharp[ly]" expanding its profit margins -- ultimately "grow[ing] into" its valuation.
Granted, CrowdStrike not profitable at present, but J.P. Morgan predicts that it will "ultimately" generate "attractive" cash flow over the long term. J.P. Morgan believes the cybersecurity specialist is worth $100 a share, the highest price target of any of the analysts recommending CrowdStrike today, and roughly triples the stock's $34 IPO price.
FBN Securities analyst Shebly Seyrafi initiated coverage Monday with a rating of outperform and price target on CrowdStrike of 80.
"We estimate that CrowdStrike will be
growing its revenue at a compound annual growth rate of 46%, about five times
the growth rate of its total addressable market," Seyrafi said in a note
to clients. He estimates the market is around $25 billion.
Where to now?
CrowdStrike crushed expectations for their last earnings report, September 07, 2019, and is promising to do so again and again as the year rolls along -- yet despite all that, investors are selling the stock.
Shares of CrowdStrike stock tumbled despite the cloud-based security software maker reporting estimate-beating results in its Q2 earnings report -- and better-than-expected guidance as well.
For Q2, analysts had predicted CrowdStrike would lose $0.23 per share (pro forma) on sales of $103.8 million. Instead, management reported a loss of "only" $0.18 per share -- and sales of $108.1 million.
Sales nearly doubled year over year and were up 94%. Some 90% of those sales came from recurring revenue subscriptions, a segment that grew even faster than overall sales: up 98% year over year. CEO George Kurtz hailed the securing of "a record number of net new subscription customers in the quarter" as a key accomplishment.
With the sell-off of CrowdStrike, shares have reached a stage of oversold and a turnaround is expected soon.
When would we expect to enter an options trade on CrowdStrike?
What will “Stock Options Made Easy” advise members to do?
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