The concept of cybersecurity is not so new. Companies have been struggling to keep data secure for decades. But as companies of all sizes collect ever-increasing amounts of data for business-critical analytics, IT leaders are increasingly investing in new and innovative solutions to keep this data secure.
As corporations around the world embrace remote work, the number of company-provided devices such as mobile phones, tablets, and laptops will increase. In the cybersecurity realm, these devices are called endpoints. IT leaders now face increasing pressure to identify cloud-native security protocols over legacy local network protection due to the nature of remote work.
data security specialist crowdstrike ( CRWD 0.54% ) is a cybersecurity innovator specializing in this endpoint security and cloud-native applications. It’s also one of dozens of tech stocks that have seen strong sell-offs in recent months due to a widespread market move toward value stocks. The company’s growth prospects have not changed, despite the liquidation, and this may present an interesting investment opportunity at its current valuation.
Top-notch financial performance
CrowdStrike recently reported its fiscal 2022 fourth quarter and full fiscal earnings results. For the fiscal year (ended January 31), CrowdStrike reported total revenue of $1.45 billion, an increase of 66%. The company’s strong revenue growth also helped contribute to the increase in cash flows.
For the fiscal year, CrowdStrike reported operating cash flow of $574.8 million, compared to $356.6 million in fiscal 2021. Additionally, the company’s free cash flow was $441.8 million, compared with $292.9 million in fiscal year 2021.
This increase in cash flow has provided the company with ample financial flexibility. More specifically, when CrowdStrike went public in 2019, the company focused primarily on endpoint security, offering customers 10 separate solutions, called modules. Currently, CrowdStrike offers 22 different modules that cover different facets of cybersecurity, including cloud security, threat intelligence, managed services, and identity protection, among others.
CrowdStrike has done a great job of illustrating to investors that it can quickly outperform the largest established security vendors and continue to gain market share in the endpoint security market, as well as other adjacent cybersecurity segments.
Industry tailwinds could be starting
Before the pandemic, it was not uncommon for companies to invest heavily in on-premises network security solutions. However, since it was founded in 2011, CrowdStrike has been working to educate the market about cloud-native architectures. It could be argued that legacy cybersecurity players like Microsoft, Alphabet (GOOG -1.80% ) ( GOOGLE -1.91% ), Amazon, Palo Alto NetworksMcAfee and others ended up offering compromise solutions by focusing on the local network and are now struggling to develop cloud-hosted or hybrid models.
The potential of cloud security can be seen in a report from investment firm IDC, which estimates that cloud IT spending will exceed $217 billion by 2023. However, investments in cloud security right now between various cloud companies it’s only about $2 billion (about 1% of the total market). IDC suggests that organizations should spend 5-10% of IT budgets on security. That suggests significant underinvestment that needs to be corrected. It also suggests a significant growth opportunity for CrowdStrike. Assuming IDC’s 2023 estimate of $217 billion, a 5% investment in cloud security would equate to approximately $11 billion of additional revenue available to CrowdStrike and its competitors.
It is likely to help CrowdStrike’s efforts to obtain this additional expense to know that Forrest Research named CrowdStrike its top endpoint detection and response provider, ahead of Microsoft, McAfee, and SentinelOne.
The positive momentum from CrowdStrike has surely not gone unnoticed in the market. For example, in the last year, Microsoft acquired two cybersecurity companies: RiskIQ and CloudKnox. Amazon, meanwhile, has acquired security specialist Wickr, while Alphabet has announced two acquisitions this year: Siemplify and principal (MDT -0.67% ).
It would be short-sighted to say that these FAANG counterparts simply acquired cybersecurity companies. The common denominator among these acquisitions is that the targets’ underlying products and services will be integrated into each company’s respective cloud offering. What this means is that Microsoft, Amazon, and Alphabet are now moving quickly to identify cloud-native solutions that can be deployed on existing cloud infrastructure in an attempt to catch up with players like CrowdStrike.
If strategic acquisitions in the cybersecurity space weren’t enough to get investors excited about CrowdStrike’s future prospects, it should also be noted that the company recently announced a strategic alliance with Mandiant. Under the terms of the agreement, Mandiant will leverage CrowdStrike’s Falcon platform for its incident response services. This collaboration speaks volumes about CrowdStrike’s power and position within the cybersecurity fabric. Furthermore, it could be a lucrative growth engine for both CrowdStrike and Alphabet, which announced its intention to acquire Mandiant in March.
Beware of the valuation
Since its initial public offering (IPO) in July 2019, CrowdStrike shares have risen 240%. Given the growing demand for cloud-native security solutions during the pandemic, the company saw dramatic increases in revenue, and shareholders subsequently rewarded the stock.
Between the time it reported fiscal third-quarter results in December 2021 and full-year results in March, CrowdStrike’s stock fell about 15.7% to about $170 per share. Like many of its counterparts in the tech field, CrowdStrike saw heavy sales activity during the last months of 2021 and early 2022.
Since fourth-quarter earnings were reported about a month ago, CrowdStrike’s stock is up about 14%. With the recent share price rise, CrowdStrike is currently trading at a price-to-sales ratio of 34. By comparison, the company was trading at almost 61 times the price-to-sales ratio in January 2021.
Investors should be encouraged that tech giants like Microsoft, Alphabet and Amazon are investing more aggressively in cloud-native cybersecurity. Despite its recent surge, CrowdStrike’s current valuation looks attractive compared to its previous trading levels. Given the tailwinds in the cybersecurity and cloud landscape as a whole, now could be an interesting time to start a position on CrowdStrike for long-term investors.
This article represents the opinion of the author, who may not agree with the “official” recommendation position of a premium Motley Fool advisory service. We are motley! Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.