Is Crowdstrike Holdings A Buy And Hold?
State of Art Equity Research | Oct 27, 2021 02:32PM ET
Crowdstrike Holdings (NASDAQ:CRWD), the cybersecurity specialist, has 49 of the Fortune 100 companies as its customers, together with 40 of the top 100 global companies and 11 of the world's 20 most prominent banking institutions. Crowstrike's Falcon software is used in 170 countries.
The company was founded in 2011, had its IPO in 2019, and was listed on the NASDAQ 100 index on Aug. 26, 2021. Very few companies make it to the NASDAQ 100 in such a short time after going public, so Crowdstrike's inclusion can be considered a significant milestone.
When a company is included in the NASDAQ 100, it gets traded through exchange-traded funds (ETFs) and mutual funds. The inclusion in NASDAQ 100 should passively boost Crowdstrike's trading volume and stock price.
h2 Innovation/h2Crowdstrike's Falcon is a cloud-native software that relies on artificial intelligence and machine learning to identify malicious activity. An intelligent bot is installed in the customers' cloud network to detect untoward behaviors.
This agent analyzes the company's digital environment and feeds Crowdstrike's system to detect suspicious activity. Experts estimate that the company has revolutionized the cybersecurity landscape through its advanced anti-virus technology and its "managed hunting service team" available 24/7.
h2 Crowdstrike's Management/h2Founder and CEO George Kurtz has been at the helm since Crowdstrike's founding in 2011. At age 55, he still has years ahead of him to fulfill his vision and mission for Crowdstrike completely. He is aligned with his shareholders' interests as he holds roughly 8% of shares worth $5 billion at recent prices.
However, through his super-voting shares, the CEO has 22% of the voting power over the firm. Employees love the work Kurtz is doing, giving him a 97.5% approval rate on Glassdoor. As of July 2021, management tenure averaged 5.5 years. Before launching Crowdstrike, Kurtz worked his way up in McAfee and was the company's CEO.
In 2021, Forrester Research (NASDAQ:FORR) named Crowdstrike the cybersecurity industry leader for the second year in a row, citing a more robust offering and growth strategy than any of its rivals, disrupting traditional cybersecurity companies such as Microsoft (NASDAQ:MSFT), Palo Alto Networks Inc (NASDAQ:PANW), and McAfee Corp (NASDAQ:MCFE).
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The consulting company's position was confirmed by research firm Gartner (NYSE:IT) Gartner, which came to a similar conclusion. As you can notice, Gartner named Crowdstrike Holdings the industry leader with regards to the completeness of vision, which can be referred to as product offering. Microsoft slightly surpasses Crowdstrike in the ability to execute its vision.
h2 Fundamental View/h2Cybersecurity is a sector that is deemed to boom as more and more workflow is stored digitally, and attacks on digital assets are becoming more sophisticated. The Colonial Pipeline ransomware attack and the SolarWinds hack have demonstrated it. Cybersecurity Ventures says cybercrime will cost $6 trillion worldwide in 2021, up from $3 trillion in 2015.
As of 2021, Crowdstrike's management puts its total addressable market (TAM) at $72 billion, and, according to analysts from Berkshire Hathaway (NYSE:BRKa), the sector compound annual growth rate (CAGR) is 11.6% until 2030. This is proof that cybersecurity has become a significant concern for business enterprises and that companies are willing to increase their spendings to operate in a safer environment.
CAGR for small and medium companies alone within the sector stands at 15.3% until 2030. On the other hand, according to Berkshire Hathaway, cloud adoption by companies is expected to climb at a 15.9% CAGR until 2030.These market opportunities should help the cloud cybersecurity specialist maintain sharp revenue growth over the next decade.
h2 Growth/h2Growth Performance against forecasts: Since its 2019 IPO, the growth company has never missed analysts' revenue forecasts and exceeded expectations by 6.2% on average. But the outstanding performance comes from earnings per share, which have exceeded estimates by 484% on average since the first analyst's coverage in November 2019.
Revenue & Gross Profit growth: In the past four years, the company had a strong revenue growth with an average of 94.91% per year. During the same period, gross profit accelerated even faster, at 117% per year.
All things being equal, this is proof that Crowstrike was successful in making economies of scale. Second quarter 2021 revenue climbed by 70% compared to second quarter 2020, and by 11% quarter over quarter.
We can see that Crowdstrike's revenue growth has been the third highest in the sector. Lightspeed (NYSE:LSPD), and SentinelOne (NYSE:S), which appear on top of this ranking, are much smaller companies with $221.7 million and $93 million in revenue, respectively, versus $874 million for Crowdstrike.
For the next three years, revenue could grow at a 26.1% CAGR. With a TAM of $72 billion and revenue of only $874 million, the cybersecurity specialist has captured only a tiny portion of the vast market and has room to become a multi-bagger. With demand expected to boom, we believe Crowdstrike is still in its very early innings.
h2 Customer Retention Rate/h2Dollar-based customer retention rate, which measures customers' increase in spending, was an incredible 125% last quarter, and it has not dipped below 100% since 2016. This is proof that customers value Crowdstrike's SaaS and that the company successfully created new revenue streams.
h2 Operating income growth/h2Since 2018, the company has invested massively in research and development. This resulted in an operating income decrease until the fiscal year 2020 when the company witnessed a vigorous operating profit growth of 63.35%. Crowdstrike is looking to boost its operating income through workflow automation further. The company just announced it is joining forces with Forrester's Robotic Process Automation Leader, Uipath (NYSE:PATH).
Declining operating profit affected net income growth, which followed the same trajectory. For the next three years, net income is forecast to grow by 48.9% per year. Free cash flow to equity growth is expected at 49.8% until 2026 and 33.9% for the next decade. On the other hand, cash from operations growth, which better reflects the company's performance and liquidity position, climbed at a 286% CAGR since 2017. Meanwhile, working capital grew slower than revenue: 54% vs. 94% for sales.
Days sales outstanding have been decreasing year over year, from 183.23 days in 2018 to 84.36 days as of January 2021. Days payable declined as well, but at a lower rate. In 2018, the company cashed in on average 100 days after it had paid its suppliers. As of July 2021, the company cashed in after 73.79 days on average after paying its suppliers.
This resulted in lower working capital which then translated into strong cash from operations growth. The latter has been steadily increasing and did not witness any decrease in the past years.
h2 Profitability/h2Crowdstrike is still not profitable on a GAAP basis as it is massively investing to be a state-of-the-art company within the sector. However, it is essential to note that the company is net income positive on a non-GAAP basis, which excludes some one-time transactions from operating expenses.
The only measures that we can use to assess the company's profitability potential are the gross margin, which is one of the highest in the sector, which stood at 73.88% as of July 2021 and the Piotroski F-score, which among other uses, measures financial performance based on a combination of three factors: profitability, leverage, and operational efficiency. As of July 2021, the Piotroski F-score was 4.
h2 Liquidity/h2The current ratio was a healthy 1.98 as of July 2021. Cash from operations: as mentioned above, working capital has been decreasing together with days sales outstanding. On the other hand, days payable decreased moderately. This, in turn, allowed the company to be cash-flow positive last year and to witness huge cash from operations growth.
The company is generating enough cash flow to grow externally. We expect some horizontal integrations in the following years, aiming to strengthen the company's value proposition and create new revenue streams.
Free cash flow also steadily increased, and the company had an incredible free cash flow margin of 21.8% last quarter. Crowdstrike, although still not profitable, manages to create value for its shareholders, and that value should continue to rise the next decade.
h2 Solvency/h2The company has a high level of debt as it has been investing in research and development. The debt to Equity ratio was 81.7% as of July 2021. Interest coverage was -11.7%. However, we are not worried about these numbers as the company's cash-to-debt ratio is 230%. The company could pay off its debt and would still have cash for acquisitions.
Altman Z-score, which measures the company's likelihood to go bankrupt, was a healthy 17.27 as of July 2021. With regards to the company's possibility to manipulate its financial statements, the Beneish M-score was -2.13, implying that the probability that the company is an account-manipulator is low.
h2 Risk Analysis/h2Historical returns and volatility: Crowdstrike's stock averaged a monthly return of 8.37% since November 2019, with a standard deviation of 14.04% and a semi-standard deviation (deviation to negative returns) of 18.8%.
Crowdstrike is still not profitable on a GAAP basis. Thus, stock price shows some volatility. But this should not scare away risk-averse investors. The company's strong position in the cybersecurity sector cannot be discussed, and the stock delivered more than 8% return to shareholders monthly, which is an outstanding performance.
Sharpe ratio, which measures the stock excess return (above the risk-free rate) per unit of volatility or standard deviation, is 0.59. This means that each unit of volatility yields a 59% return, which is quite a good performance.
Sortino ratio, which measures the stock excess return (above the risk-free rate) per unit of negative volatility, or standard deviation of negative returns, is 0.44. The deviation to negative monthly returns is higher than of average total returns. However, 49% return per unit of negative volatility is still an excellent performance.
Beta: which assesses the company's exposure to systematic risk, and is the sensitivity of stock price relative to S&P 500 price movements is 1.33. Crowdstrike price volatility and exposure to systematic risk are lower than peers with a comparable growth rate and are still not profitable on a GAAP basis.
The skewness coefficient of monthly return, which assesses the degree to which returns are distributed is 0.009, suggesting that the return distribution is almost symmetric (think of the bell curve). Returns are slightly positively skewed, showing that the stock tends to yield frequent small losses and few extreme gains.
This is another reason why I consider Crowdstrike a holding and not a trading stock. You'd better be in the rocket when it takes off. Excess Kurtosis coefficient, which assesses the risk of extreme returns and is used to measure the risk of abnormal returns, those that could go way beyond the standard deviation, is a low -0.45.
This indicates that the probability of extreme returns is low. Negative or platykurtic excess kurtosis is what all investors are seeking.
h2 Company Valuation/h2We will be performing a 2-stage free cash flow to equity (FCFE) perpetuity discounted cash flow model. We will be using Markowitz's Required Rate of Return (RRR) as the hurdle rate or discount rate. We will only be showing you the results of our calculations. The RRR is 6.2%. Below is a table of analysts' average FCFE forecasts from 2022 to 2031 that we will be discounting for perpetuity.
2022: 369.69
2023: 545.96
2024: 739.21
2025: 1333.00
2026: 2089.5
2027: 2696.73
2028: 3261.34
2029: 3758.5
2030: 4181.66
2031: 4535.88
Firm intrinsic value = $75014.14 million
Share intrinsic value = $328.73
At the current price of $273.11, the company is 16.9% undervalued. Let's consider that analysts made these FCFE forecasts and that the company beat analysts' earnings expectations every quarter since IPO. The stock looks even more undervalued.
h2 Highlights/h2- The company boasts solid companies as customers, almost half of fortune 100, half of the largest multinational firms, and more than half of the world's largest banks.
- Those customers increase their spending year over year as their needs for cybersecurity rises. Customer retention rate has not dipped below 100% since 2016 and was 125% last quarter.
- Cybersecurity is a sector deemed to boom. More and more data are stored digitally, and attacks are getting more sophisticated, as demonstrated by the ransomware attacks by the Solarwind and Colonial pipeline.
- Cloud cybersecurity is expected to have the highest CAGR.
- The company was named an industry leader by the two most respected Research firms, Gartner and Forrester Research.
- The company never missed analysts' forecasts and averaged an incredible 484% excess return compared to expectations.
- Revenue and gross profit growth were sharp in the past few years and are expected to resume.
- Operating profit increased by 63.35% last year. The company is working to automate some of its workflows and partnered up with RPA industry leader Uipath, which could boost operating income.
- Cash from operations boomed by 286% per year as the company managed to contain working capital.
- The stock returned more than 8% per month to shareholders.
- The company is 16.9% undervalued, and if the company keeps beating analysts' expectations in the coming years, the stock will prove to be an excellent value right now.
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