Winning the market requires knowing when a shift is about to happen
There has been a lot of interest in cybersecurity firms, especially from 2020 and there are several companies that occupy this space, including ZScaler, Palo Alto Networks, Fortinet, FireEye and the rise of this especially strong leader in the field, Crowdstrike.
Crowdstrike has especially strong compound annual growth and this has given it a price to sales multiple of 60x at its current peak. Its service offering is unique, revolutionising endpoint protection by combining three crucial elements including next-generation anti-virus, endpoint detection and response (EDR), and a 24/7 managed hunting service delivered via the cloud. No need for on-site installations or upgrades. Everything gets pushed through the cloud, allowing it to use its powerful subscription model like how Adobe, Microsoft do theirs.
How is Crowdstrike’s growth doing?
Pay close attention to how the purple line slopes downwards. It is currently running at 70% but by the time we move down six quarters or more, we should see it moving at a much slower clip as growth begins to taper and arrive at a certain equilibrium.
The company is running losses albeit a narrowing of it. As it crosses $1b in billings, it should further rein in losses and start earnings profits. Its marketing expense has been growing year on year to acquire new customers but because it has a subscription model in place, it will be able to move itself into profitability once it has dominant market share and occupies a good space where it can do two things that are important for a tech stock like it:
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Innovate and improve product/service offering.
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Upsell to existing customers.
Source: https://finance.yahoo.com/quote/CRWD/key-statistics?p=CRWD
Key consideration going and growing forward
As this is the growth stage and cybersecurity on the cards of many companies following many company hacks taking place, the retention is generally very high.
What I would like to see is for Crowdstrike to have retention rates of above 100%, which would signal their ability to upsell other forms of services. They will need to already strategise this given that this sector is constantly evolving and when competitors catch up with their tech, the price pressures will come bearing down on revenue and profits.
At the moment, Crowdstrike still has room to run but its price point has fully captured its forward growth as demonstrated in its exhorbitant P/S of 60x and forward P/E of 375x!
While there is little foreeseable to cause price to plunge, we need to be mindful of black swans and the what-ifs. If you are thinking of jumping in, dip your toes, but not plunge.
Yours,
Chief Editor
BBA Market Perspectives
Stay tuned!
*As again, this does not constitute investment advice. Please do your own due diligence before investing.)
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