Crowdstrike's Compounding Strategy Can't Be Ignored | Crowdstrike Analysis

Following up on @Fergus 's cybersecurity topic, here is an overview of how one of the leading cybersecurity companies is making money: Crowdstrike $CRWD. Are investors overlooking the opportunities?

Crowdstrike’s mission is to protect their customers from breaches. The company was founded in 2011 to reinvent security for the cloud era. Crowdstrike now offers a total of 22 cloud modules on their Falcon platform through a software as a service model (SaaS). Customers pay subscriptions to use the licensed software.

At moment companies are not yet paying enough attention to the security of their cloud data. Cloud security spend for 2023 is only 0.9 as a % of the cloud computing revenue. So as breaches become more common this percentage may change very quickly and companies like Crowdstrike might benefit from this.

The company sees their total addressable market (TAM) growing by 11% in 2023 and 2024 with their current portfolio. But if you count in the new offerings, future initiatives and the cloud security opportunity, then Crowdstrike’s total addressable market could grow a lot faster towards 2025. The modules that Crowdstrike offers are very important to keep an eye on. These help Crowdstrike expand their total addressable market. Each module has a different task to defend a possible threat.

Customers are adopting more modules in their subscriptions. 69% of the customers now uses 4 or more modules. 57% uses 5 or more and 34% uses 6 or more modules. If Crowdstrike can keep bringing out new useful modules then it can positively increase their revenue.

Crowdstrike’s business model is based on a subscription offering. They are expanding their subscription number really fast. Year over year they grew their subscriptions by 65%. Notice that the customers are not small flies. 254 of the largest companies in the US by revenue are a customer of Crowdstrike, with 15 of the top 20 banks. So we can say that Crowdstrike has a very good reputation.

This subscription model gives the company annual recurring revenue or ARR. With this business model it is very hard to lose revenue or do a bad quarter since the subscriptions keep rolling in money every month. You can clearly see that Crowdstrike is growing exponentially.

That aside, the company has a net retention rate of 124%. Net revenue retention is the percentage of recurring revenue retained from existing customers over a given time period. So they are gaining more money each quarter from existing customers, this can be by price increases or customers expanding their subscriptions. By other words this business model is compounding and is extremely sticky.

Looking at the balance sheet, Crowdstrike has with 2 billion dollars a pretty healthy amount of cash. The company is not heavy loaded on debt and can pay off all outstanding short term bills. Goodwill increased a lot because they did an acquisition of the company Humio.

Valuation wise Crowdstrike seems very expensive. The company is still expanding a lot and investing for the future. This causes the company to have negative earnings and to not yet have a p/e. A positive sign is the fast growth in free cash flow, the company can use this money to reinvest in the business and will be less reliant on dilution or going into debt.

Currently I’m holding 2 shares of Crowdstrike, which is around 3.3% in my portfolio. The company might be expensive but in my opinion this quality company has been executing very well. The business model and the growing industry might be worth the expensive price. Ofcourse we have to follow up the growth closely and reassess. Crowdstrike has a lot going for it and cybersecurity will get more and more important as we move to the clouds. This is a long term play and I’ll be adding to my position whenever other people are dumping it. Understand that this stock can be volatile and a strong stomach could have its use!

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DISCLAIMER: I do own shares of Crowdstrike. I am not a financial advisor. Investing is your own responsibilty. I am not accountable for any of your losses.