Today we’re going to look at a stock that I am rather bullish on, and thanks to the recent market weakness I was able to start a position in it at a really good entry point. The stock I am referring to is Crowdstrike, ticker symbol [CRWD].
I first added this stock to the PIF Growth Portfolio on January 25th at $161. I currently have an average price of $166.
with this particular position, I have already hit my target annual rate of return of 30%.
This article covers:
- What does Crowdstrike do?
- Crowdstrike’s competitive advantage.
- PIF comfort level with Crowdstrike from a halal perspective.
- Size of Crowdstrike’s Total Addressable Market.
- Crowdstrike’s valuation (Buy, Hold and Sell).
What does Crowdstrike do?
If you think of how you work on your laptop, desktop, or mobile device, you may have noticed a shift in the past few years to working online as opposed to offline.
For example, I wrote this article and saved it in Google Drive, an online storage space that I can access from anywhere using any device. It’s much more convenient for me to do things this way as opposed to saving my work on my laptop or a USB drive and having to take my laptop or USB drive with me to access my work.
What Google Drive is to storage services, Crowdstrike is to cybersecurity services. That is, Crowdstrike provides businesses with cybersecurity solutions that are hosted online.
CrowdStrike’s mission statement is simple and to the point:
“We stop breaches.”
Its various services can secure desktops, laptops, mobile devices, tablets, servers, provide identity protection, and block unauthorized access to data, without the need for any on-premise equipment or infrastructure.
In addition to being convenient for its customers; not having to worry about updating their security software or updating their infrastructure to support the newest version of their security software, , there is another fundamental advantage to Crowdstrike’s service which is that the lessons learned from other customers are automatically used to improve the protection being provided to the entire network.
So for example, let’s say Company A experiences a cyberattack that Crowdstrike handles. Other Crowdstrike customers immediately benefit from the data and lessons learned from that experience since Crowdstrike’s online platform incorporates this data and uses it to protect the rest of its network in real-time.
So you have real-time adaptation to new threats as opposed to the traditional model where each new release of the software could only handle a certain set of threats and if a new threat were to emerge, you had to wait for the next release of the software to gain protection from it.
This dynamic creates a powerful virtuous cycle for Crowdstrike where the more customers it attracts, the more data it collects, the smarter its protection becomes, and in turn the more customers it can attract. Today, Crowdstrike’s security software monitors more than 1 trillion events daily.
This helps explain why More than half of the fortune 500 companies use Crowdstrike for their cybersecurity needs.
PIF’s Comfort Level with Crowdstrike
There is nothing inherently haram in the services Crowdstrike provides.
If you look at their percentage of interest expense compared to total expense, in the last twelve months, it’s less than 1%.
Just as a disclaimer, this is what I like to look at, other people, services like to focus on debt-to-equity which in my opinion has the shortcoming of neglecting to account for the interest rate of the debt. Debt on its own is not haram, interest on debt is what is haram. An amount of debt with 0% interest is not haram for a company to have. Therefore the amount of interest paid, in my view, is a better metric to determine permissibility, not the amount of debt. If the amount of interest being paid is immaterial with relation to the overall size of the company’s operations then I am inclined to be comfortable with the company’s finances.
In the case of Crowdstrike, interest expense compared to total expense in the last twelve months is less than 1%. So this tells me that using interest is not a material part of how their business is run.
The third thing checked is the Environmental, Social, and Governance Impact of the business which is uneventful on the bad side and eventful on the good side in light of the many attacks and threats that have been neutralized by their services.
So in light of the above analysis, PIF has a comfortable rating for Crowdstrike from a halal perspective.
Crowdstrike’s Total Addressable Market
According to Crowdstrike’s estimates, and keep in mind these estimates are coming from Crowdstrike so they are likely self-serving a bit, but they estimate the total addressable market for its current portfolio of products to be $67 billion in 2024, with future planned offerings it thinks this market may be as large $116 billion by that time.
CrowdStrike’s annual recurring revenue rose to $1.73 billion in Q4, which means even if no new customers are added this year, the recurring revenue rate would generate an increase of 20% in revenue compared to last year.
Crowdstrike retained 98.1% of all Q4 2021 spending in Q4 2022, this is fantastic customer retention which is a testament to just how sticky its product offerings are and how many customers like them which is very advantageous if you have a subscription business.
Additionally, the customers that stayed with Crowdstrike, which is all of them, spent on average, 24% more than they did last year (this calculation accounts for those who left and now spend nothing).
It also added 1,638 net new customers in the quarter, growing 65% over last year’s number. So we’re looking at stellar performance in 2021 with very strong guidance in 2022.
Now let’s look at valuation. Crowdstrike has annual revenue in the last twelve months of about $1.5 billion and trades at a valuation close to $50 billion or a price-to-sales ratio of 33.
With an average expectation of 50% growth annually over the next 1-3 years, by January 2025 revenue is expected to be close to $3.6 billion.
Assuming projected growth drops to around 30% annually by that time, price-to-sales multiples for software-as-a-service companies growing at 30% annually are in the range of 20.
If you look at ServiceNow for example, they are a software-as-a-service business with margins similar to Crowdstrike and have projected growth of 30% annually and their current Price-to-Sales ratio is ~20.
For CrowdStrike, this would impute a value for the company of roughly $80 billion in 3 years which is around a 17% annual return from where it is right now. Since I aim for a 30% annual return, I would not buy at today’s valuation which is around $210 per share. I will hold at these prices. I would sell if the expected return started to approach the general market return, which I estimate is around a $55 billion valuation or $230/share mark. I would buy it again if it drops below $190.
This analysis is contingent on no new major events affecting my hypothesis and these numbers and price targets will be revisited with every new earnings report.
Disclaimer: Author holds a long position in Crowdstrike [CRWD]. Anything you read in this article is an opinion. It is not to be considered personalized financial advice. Make sure you do your own due diligence before making any investment decisions.