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CrowdStrike’s Soaring Cash Flow Makes It a Top Cybersecurity Pick | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware


Cybersecurity is a top priority for companies. It has to be, with an estimated 500 million cyberattacks worldwide last year. Endpoints (anything that connects to a network, such as laptops, desktops, and cellphones) are the source of 90% of successful attacks, according to IBM. This means companies will spend a good chunk of their IT budgets on cybersecurity, particularly securing those endpoints, recession or not.

CrowdStrike (CRWD 0.18%) is the market share leader in endpoint protection. This is why it has been one of my top tech picks for quite a while. The stock is up 75% year to date, but long-term investors can still consider the stock. Here’s why.

CrowdStrike’s cash flow tells a story

Growth stock investing is tricky. Some investors shy away because these companies are often unprofitable or have sky-high price-to-earnings (P/E) ratios once they turn a small profit. But many of the world’s most successful companies and investments (like Tesla, Amazon, Meta, and Alphabet) were unprofitable for years after their initial public offerings. 

The reasons are simple. Growth and product development cost money. If CrowdStrike hadn’t spent $179 million on research and development (R&D) last quarter, it would have posted a 22% operating margin. CrowdStrike will spend billions on R&D for years to come, but this shows that its core products are actually quite profitable. This is one of the things that Wall Street experts look for. 

They also look for positive and growing cash flow from operations (CFO). CFO is the cash left after the company has paid for its day-to-day costs, like R&D, sales and marketing, and employee and office expenses. It can better reflect a company’s health than net income because it measures the actual money being generated and eliminates non-cash expenses like depreciation and amortization.

Cash flow is often a precursor to future profit. CrowdStrike has produced $1 billion in CFO during the trailing 12 months, as shown below.

Data source: YCharts

Being cash-flow positive also allows the company to build its cash reserves ($3.2 billion as of last quarter), make strategic acquisitions, and minimize long-term debt. Case in point — CrowdStrike announced the acquisition of the application security management company Bionic in September. The company expects this to be a great addition to its cloud security platform.

Is CrowdStrike stock a buy?

CrowdStrike stock trades at a price-to-sales (P/S) ratio of 16, which is lower than other high-grow software-as-a-service (SaaS) companies like Palantir at 17 and Snowflake at 19.5, but higher than fellow cybersecurity company Zscaler at 14.5. This puts it in the range of what the market is paying for these types of companies.

The key will be increasing sales rapidly so the stock will rise even when the valuation stays steady. CrowdStrike’s growth trajectory is depicted below.

CrowdStrike annual recurring revenue growth.

Image source: CrowdStrike.

Annual recurring revenue rose to $2.9 billion last quarter, and signs point to continued growth for a few different reasons.

First, companies must spend on security no matter the economy, as discussed above. Then, CrowdStrike is terrific at monetizing and keeping its customers, having a 97% gross retention rate and a greater than 120% net retention rate since 2019. Net retention measures the average growth of customer spending over time — 120% is impressive.

CrowdStrike operates in a growing and necessary industry; its results make its stock a strong candidate for long-term growth investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Bradley Guichard has positions in Alphabet, Amazon.com, and CrowdStrike. The Motley Fool has positions in and recommends Alphabet, Amazon.com, CrowdStrike, Meta Platforms, and Tesla. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.

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