CrowdStrike: This Next-Gen Cybersecurity Company Has Significant Upside Potential (CRWD)

Investment Thesis

CrowdStrike (NASDAQ:CRWD) provides cloud-based endpoint and workload cybersecurity products, and they are one of the fastest growing cybersecurity companies in the world. Thanks to their innovative cybersecurity platform structure, effective protection, and the macro trend toward a hybrid workplace, CrowdStrike has been growing at a truly amazing pace in the past several years. Also, their technology was recognized as a leader in modern endpoint security by Gartner, Forrester, and IDC.

As more and more devices and computers are connecting to the internet, the need for cybersecurity will only keep increasing. I expect CrowdStrike to outperform the overall cybersecurity market. The recent sell-off in the stock market, and particularly the high growth sector, created an opportunity for the investor to grab these shares at a bargain. I believe CrowdStrike presents a great investment opportunity because:

• CrowdStrike is considered the best endpoint protection company in the world thanks to their advanced technology and innovative platform.
• The need for cybersecurity is only increasing, and the shift towards a hybrid work environment will positively contribute to growth for their products and services.
• They have a strong balance sheet with plenty of cash and solid operating cash generation, which will further improve over time.

Best in class technology and innovative platform

CrowdStrike's cybersecurity structure is innovative and very effective at large scale end point protection. Compared to traditional cybersecurity software that relies heavily on scanning a file and detecting a virus (or malware) signature, CrowdStrike's system uses an agent-based light "sensor" that is installed on an individual computer and connected to the cloud-hosted platform.

This infrastructure has many benefits. Foremost is the efficiency of managing cybersecurity policies, reporting data, and responding to the threat. As long as the computer is connected to the host platform, the agent is automatically updated, so you don't have to install new versions of patches or programs and reboot the computer.

Secondly, combining the cloud-based structure and their advanced AI and Distributed Threat Graph technology, the effectiveness of identifying a threat and responding appropriately is off-the-chart compared to legacy technology. Basically, instead of a single software program on an individual computer fighting against the threat, CrowdStrike's platform and technology allows the entire network of computers to fight against the threat together. Also, as more data is collected from the network, the AI system gets "smarter" and becomes more effective against future threats.

Lastly, their platform is very scalable. Since the platform relies on the network effect from multiple agents connected to the system, the effectiveness of the system increases as more data and endpoints become available. Therefore, their cybersecurity solution is highly scalable and is suitable for businesses ranging from a single individual to a large corporation.

Increasing need for overall cybersecurity industry and CrowdStrike specific tailwind

As cybercrime increases and the threats become more sophisticated, the need for cybersecurity will only increase. Also, the size of the network (computer, tablet, mobile, and etc) is increasing at a truly amazing speed, making it more and more critical to protect a system for individual and corporation alike. The overall cybersecurity market is projected to reach $146 B annual revenue in 2022, and the figure will increase to $211 B by 2026.

The current hybrid work environment means that lots of employees are connecting their laptops to the corporate network, and this provides the perfect environment for CrowdStrike to thrive. Their cloud platform and light agent sensor structure is ideally suited for such a scenario. With the CrowdStrike system, an employee has minimal need to physically interact with the IT department, while the corporation still can maintain up-to-date protection on each employees' computer. So the endpoint protection is not compromised by the home network. This is crucial, since many other systems can secure a corporate network but are less successful when the workers are dispersed across remote locations. Therefore, I expect CrowdStrike to outperform the overall cybersecurity market, which will be growing at a rapid pace in the first place.

Strong balance sheet and improving cash flow from operations

CrowdStrike has a pretty strong balance sheet with plenty of liquidity. They have total cash of $1.91 B against total debt of $776 M, which brings their net debt position to a negative $1.13 B. With this kind of cash position, they can certainly support growth and acquire key technology or companies as necessary (e.g., SecureCircle or Humio). Also, not surprisingly, they have high liquidity with a current ratio of 1.9x and quick ratio of 1.8x, showing they are far from a position of financial distress.

They turned operating cash flow positive in 2020, and cash flow has been growing rapidly ever since then. Operating cash flows were $99.9 M, $356 M, and $529 M in 2020, 2021, and TTM (trailing twelve month) respectively. Given their superb revenue growth (98%, 5 year average), I expect this operating cash flow growth to continue well into the future, and this strong operating cash flow will further strengthen their balance sheet and liquidity.

Intrinsic Value

I used a DCF model to estimate the intrinsic value of CrowdStrike. For the estimation, I utilized cash from operation ($529 M) and current WACC of 8.0% as the discount rate. For the base case, I assumed operating cash flow growth of 70% (last quarter operating cash flow growth) for the next 5 years and zero growth afterward (zero terminal growth). For the bullish and very bullish case, I assumed operating cash flow growth of 75% and 80%, respectively for the next 5 years and zero growth afterward. Given the macro tailwind for the cybersecurity industry as a whole and the scalability of their platform and technology, I expect them to continue growing for a while at a pace consistent with recent high growth.

The estimation revealed that the current stock price represents 20-30% upside. Given their advanced technology and the increasing demand for cybersecurity, I believe they will achieve this upside in the long run.

The assumptions and data used for the price target estimation are summarized below:

• WACC: 8.0%
• Operating Cash Flow Growth Rate: 70% (Base Case), 75% (Bullish Case), 80% (Very Bullish Case)
• Current Operating Cash Flow: $529 M
• Current Stock Price: $179.03 (03/04/2022)
• Tax rate: 30%

Risks

The technology sector in general, and the cybersecurity space specifically, is a rapidly changing environment. There is always a decent possibility that next generation technology will come along and substantially decrease the demand for existing technology. Therefore, there is certainly the chance that new industry-disrupting technology emerges to capture market share from CrowdStrike. However, given the generous R&D budget ($332 M, TTM), I expect CrowdStrike to maintain their technological superiority and acquire key technology where needed.

It is nearly impossible to predict the outcome or timeline of a geopolitical conflict. The ongoing Russia-Ukraine war will continue to rock the overall equity market for a while, and growth stocks tend to get hit hard during such times. Therefore, only an investor with strong conviction and who is prepared to hold their share through some price swings should consider a stock like CrowdStrike.

Conclusion

CrowdStrike is a very exciting company. They have an innovative platform and technology that is critical for our life and cybersecurity. The overall cybersecurity industry will grow at a solid pace, and I expect CrowdStrike to grow even faster than the overall industry. Superb technology, a strong balance sheet, and high operating cash flow should nicely support future growth. I expect 20-30% upside from here.

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