Leader in a niche industry is set to grow at a strong rate to gain market share
Nasdaq-listed CrowdStrike Holdings is a global cybersecurity leader that provides cloud-delivered protection of endpoints, cloud workloads, identity and data through a Software as a Service (SaaS) subscription-based model.
The company’s Falcon platform spans multiple large security markets, including corporate endpoint security, security and IT operations, managed security services, observability, cloud security, identity protection, threat intelligence, data protection and cybersecurity generative AI. CrowdStrike is trading at US$323.71 ($435.07) per share, giving it a market capitalisation of about US$78 billion.
We have chosen to retain our top performer in the 2023 portfolio for a multitude of reasons, with the key reason being that it is still undervalued. An undervalued stock trades below its intrinsic value and we think that CrowdStrike still has much to offer in terms of value growth. In other words, CrowdStrike should be able to maintain its share price growth momentum as long it continues to perform well within or beyond the expectations of the market. Another supporting factor for the company’s undervaluation is the sustainable growth in its business fundamentals and not just financial outperformance through beating earnings expectations of the market.
Our case for the company remains the same. CrowdStrike is a leader in a niche industry set to grow at a strong rate which should enable the company to gain market share. CrowdStrike’s focus on the network effect by offering scalable, subscription-based products and solutions is strategic as companies in the cloud industry are dependent on the network effect for the growth in value of their businesses. The company’s strong margins reflect the competitive advantage it has over peers, through its better offerings in terms of functionality and convenience mainly through better technology. While other security products are relatively more expensive and complex, CrowdStrike’s cloudscale AI gets smarter as it consumes more data to offer more effective products and services, and its technology is further enhanced by the wide range of clients it covers. 94% of the company’s revenue is from subscriptions, which denotes better earnings visibility — Chart 1 shows the growth in annual recurring revenue over the past three years, with the most recent y-o-y growth of 35%.
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In terms of the company’s growth opportunity, CrowdStrike’s total addressable market (TAM) for 2024 is US$100 billion, and the breakdown of it is illustrated in Chart 2. Over the next four years, the TAM is expected to more than double to $225 billion. Given that the company’s annual revenue is less than 1% of the current addressable market, there is still plenty of room for the company to grow in value and capture market share in its AI-native security platform niche. Additionally, given CrowdStrike’s target operating model of operating margins and free cash flow margins of over 30%, the company should be able to capture much of the available TAM in the upcoming periods.
Short-term catalysts for the company include increased geopolitical tensions globally such as the Israel-Palestine conflict, which increases the frequency of cyberattacks. This would also provide the company an opportunity to cross-sell subscriptions to its Falcon platform and cloud modules. Over the longer term, given that a majority of the company’s customers purchase one-year subscriptions, CrowdStrike would be able to upsell and revise its pricing more frequently for its more updated offerings, which should aid in its target operating model of maintaining high margins.
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CrowdStrike’s financials have been consistently excellent, particularly its cash flows. Chart 3 shows the company’s operating and free cash flows over the past 12 quarters. The current free cash flow margin of the company is 30.2%, which is within its target. In terms of financial safety, the company has a cash ratio, quick ratio and current ratio of 1.3, 1.6 and 1.7 times respectively, indicating strong liquidity. Further, solvency for the company should not be a concern as it is net cash.
The company has 47 “buy” calls, three “hold” calls, and two “sell” calls, with an average target price of less than 10% above its current trading price. Based on our inhouse valuations, we believe that the intrinsic value of the company is at least over 75% above its current trading price for the next 12 months. CrowdStrike, which is at the forefront of the cloud security niche, is expected to benefit greatly from the increasing demand for cloud-based products and services and is suitable for investors seeking high-growth companies.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
