CrowdStrike -- Stronger in Numbers
Meera Equities 09.21.2020
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Investment Thesis
CrowdStrike is an innovative endpoint cybersecurity company focused on consolidating cloud cybersecurity into one product mix. They have been rapidly growing their top line for nearly a decade and Covid-19 has only made their business more pronounced with companies continuing to work remotely. As the world continues to move to the cloud and focus on data, both big and small companies will continue to need innovative security that adapts with the times. As this company grows its user base, its product only becomes stronger.
The scale is a huge factor in investing when looking at margins, but the scale for CrowdStrike hits on two important facets of the business. Profitability and a more powerful product produced nearly organically.
Company Description
CrowdStrike is a cybersecurity vendor that specializes in endpoint protection, threat intelligence, and hunting, attack remediation, and offers various solutions to supplement security and network operations, teams. Its cloud-based architecture collects data across all its endpoint agents, analyzes the information within its cloud platform, and updates all its customers' security posture. As a new type of cybersecurity attack is used, every customer on CrowdStrike’s platform is protected from it.
Qualitative
Overview
Sector: Technology
Industry: Software – Infrastructure
Competitors: VMWare, Trend Micro, Broadcom
Strategy: Create a dynamically changing algorithm to detect security threats and secure existing customers from similar new attacks.
Business Model: Provide businesses with a safe and intelligent algorithm to detect and protect against growing cybercrime and hackers.
Their flagship Falcon Cybersecurity platform is an endpoint solution for laptops, desktops, and servers
Falcon Platform is designed to retain and learn from previous threats and dynamically improve over time as attacks occur
Have added 8 new cloud models including AWS Integration, License Management, Asset Inventory Management among others
Market: Corporations and Governments
The 2020 estimate for cybersecurity spending is $173 Billion, CrowdStrike’s footprint on this industry is less than 1%
Primary driver of growth is from corporations, but the US government has an active contract with CrowdStrike. The amount is not disclosed and could open doors to other world governments
CrowdStrike was founded and primarily operates in the US, but they also operate in Europe, the Middle East, Africa, and Asia
In 2018 the US was 84% of its total revenue, but now the US only made up 73% of its total revenue. International exposure could be a big growth driver for this company
X-Factor: Retention Rates
Consistently performing at incredible retention numbers, management has targeted a 120% benchmark for dollar-based retention rates
New customers use the platform, but with CrowdStrike’s approach of direct sales, their employees can sell additional products to their existing customers
Since 2016, they have added 8 new cloud modules to boost net retention rates
Their sticky platform not only up-sells their clients, their gross retention rates have been over 94% for 12 consecutive quarters. With the last 5 quarters being 98%
Cash Cow: SaaS Subscriptions
SaaS revenue has grown from 72% of revenue in 2017 to 92.5% in Q2 2020
Revenue growth YoY was 84%, with SaaS revenue increasing by 89%
SaaS gross margins are currently 75% while their one-time gross margin is only 35%
Management has targeted SaaS revenue to be 75%-80% of the total revenue, over the last two years they have been significantly above this target
Quanitative
Risks
CrowdStrike has only reported one adjusted net income positive quarter, they are cash-flow negative
There are larger companies that are beginning to enter the endpoint cybersecurity market
Switching costs between endpoint cybersecurity is less costly
CrowdStrike is pouring money into marketing and R&D, if competitors develop a similar product at a discount, they could gain market share from CrowdStrike
CrowdStrike is trading at 47 times current sales, and their shares have gained 163% year to date. Valuation could be a concern
Learn Something
SaaS: Software as a Service. A reoccurring revenue stream from a business’s clients. Click the link below to learn more.
Power of Annual Reoccurring Revenue: https://www.saasoptics.com/saaspedia/arr/
End Point Security: https://www.mcafee.com/enterprise/en-us/security-awareness/endpoint.html
Growth vs Scaling a Business: https://blog.spendesk.com/en/growth-vs-scaling
