CrowdStrike Stock: $5 billion in revenue by 2025 (NASDAQ: CRWD)

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CrowdStrike (NASDAQ: CRWD) is the rare tech stock that hasn’t seen its valuation multiples destroy amid the general weakness in the tech sector. The relative strength is understandable given investors’ appetite for cybersecurity stocks, as as well as the solid fundamentals of the company. While the stock isn’t exactly cheap, the clear history and strong profit margins justify a premium multiple. I expect shareholders to be rewarded by owning CRWD for the long term, but at a lower projected return than can be found elsewhere in the technology sector.

CRWD stock price

CRWD initially fell alongside other tech stocks but has since rebounded sharply from the lows, likely on anticipation of increased cybersecurity spending following the Russian-Ukrainian war.

CRWD stock price
Data by YCharts

Now trading at $235 per share, the stock is 21% below all-time highs, but the valuation multiple remains very rich, especially given the valuation reset that has occurred in the financial sector. technology. I last covered the stock in December when I called the stock a buy on the back of a strong history of secular growth and high profit margins, which have been offset by a premium multiple. These characteristics still apply and the CRWD has since issued long-term guidance which could help strengthen the premium multiple. Although the valuation doesn’t provide much in terms of headroom, this top cybersecurity operator offers one of the low-risk growth stories available in the market today.

What is CrowdStrike?

CRWD is a cybersecurity company that focuses on securing endpoints. Endpoints are like cell phones, computers and other devices – CRWD allows its customers to determine which endpoints are safe to access protected data.

CrowdStrike Overview - Falcon Platform

April 2022 CrowdStrike Presentation

Over the past few years, CRWD has quickly become the market leader in endpoint security.

CrowdStrike market share

April 2022 CrowdStrike Presentation

This achievement is not surprising given that CRWD seems to have the best product offering. Evidenced by the high ranking of the company by Forrester.

CrowdStrike in the EDR market

April 2022 CrowdStrike Presentation

Along with this high ranking, CRWD is now building brand recognition. The company wins business from larger companies, which should in turn help it win business from smaller companies in the future.

CrowdStrike Company

April 2022 CrowdStrike Presentation

CrowdStrike Stock Finances

Unlike other tech stocks that saw their growth slow rapidly in 2021, CRWD was able to increase earnings by 66% last year. Cybersecurity is not something that was just a fad during the pandemic.

CrowdStrike Revenue Growth

April 2022 CrowdStrike Presentation

CRWD achieved strong growth due to two factors, the first being the rapid growth of its customer base.

CrowdStrike Customer Growth

April 2022 CrowdStrike Presentation

The second factor is its strong dollar-based retention rates, which have remained strong even as the company topped pandemic comparables.

CrowdStrike retention rate

April 2022 CrowdStrike Presentation

Investors are likely big fans of the company’s 30% free cash flow margin.

CrowdStrike Free Cash Flow

April 2022 CrowdStrike Presentation

I note that since many of its customers prepay their subscription revenue in advance, this has the effect of increasing free cash flow even though the cash coming in is representative of future revenue earned. Investors might thus wish to focus instead on the non-GAAP operating margin, which was still solid at 19% in 2021.

Margin not compliant with CrowdStrike

April 2022 CrowdStrike Presentation

Looking ahead, CRWD still has a long streak of growth, as market penetration remains very low, especially among smaller businesses.

cybersecurity growth opportunity

April 2022 CrowdStrike Presentation

Cybersecurity is a long-term, centuries-old growth story – every business will probably eventually need to purchase a cybersecurity product to protect against cyber threats. With CRWD positioned as the undisputed leader in endpoint security, it has a clearly visible track to continue growing at a rapid pace.

Is CRWD stock a buy, sell or hold?

As for this lead, management has made it even clearer by giving guidance for at least $5 billion in revenue by 2025.

CrowdStrike Tips

April 2022 CrowdStrike Presentation

Many tech companies like ServiceNow (NOW) and Snowflake (SNOW) have given this kind of long-term guidance, which has generally helped stocks gain premium multiples – CRWD is no different. Wall Street consensus estimates surprisingly expect CRWD to underperform these forecasts, earning just $4.8 billion in revenue in 2025.

CrowdStrike Consensus Estimates

Looking for Alpha

Now let’s talk about evaluation. CRWD has set long-term goals of 22% operating margins and 30% free cash flow margins.

CrowdStrike target margins

April 2022 CrowdStrike Presentation

The company has already achieved free cash flow margins of 30%, although this is largely due to the prepayment of deferred revenue. I guess the company can achieve 30% net margins in the long run. I could see the stock maintaining a 2x price-to-earnings growth ratio (“PEG ratio”) due to cybersecurity growth and positive cash flow generation. Assuming a 25% exit growth rate in 2025, the stock could trade at 15 times sales in January 2026. This reflects a stock price of $312 per share or an upside of around 7% on an annualized basis. If we instead assume long-term net margins of 40%, the new stock price target would be 20 times sales or $415 per share, representing 15% annualized upside potential. While these latter assumptions may seem aggressive, I wouldn’t be surprised if Wall Street maintains a similar view on the stock given the current high margins. Given the valuation, the main risk here is that stock sentiment deteriorates and the stock experiences margin compression. In the current environment, I could see stocks trading at a 1x PEG ratio, which would lead to a stock price of $156 per share by 2025, down 34% over the past 4 coming years. That would be a terrible return, especially considering I use 4-year goals. Another risk is that the company may not be able to maintain its market leadership, which would not only lead to further multiple compression, but also a potential inability to meet its growth objectives. Based on where the stock price is trading today, I am rating the stock as a buy largely due to my prediction that management’s 2025 earnings forecast will prove cautious and that the stock should be able to maintain its premium multiple.

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