crowdstrike is a high-quality cybersecurity company that has crushed the market since it
came public in 2019. however, this high growth software company is currently down more than
47% percent from its 52-week high while shares are still really expensive on an absolute basis
we actually think that right now is a great time to start a position in this high-growth business
why we'll explain all of that next my name is brian feroldi and my name is brian stoffel
thanks to commonstock for supporting today's video as of the time of this recording both brian and
i are already shareholders of crowdstrike so brian even though crowdstrike is down over 40%
from highs it's still a $36 billion dollar company crowdstrike mission is to protect our customers
from breaches this is simple inspirational and optionable man do i love this mission statement
i do too so how does the company do this well as you mentioned this is a software as a service
cyber security firm they offer now 22 different tools that help protect companies from breaches
crowdstrike has done a phenomenal job at attracting customers ever since this business was
launched and as of the most recent quarter it had more than 17 000 total customers on its platform
among those customers are some of the biggest in the world including over half of the fortune
100 and fortune 500. crowdstrike's annualized recurring revenue growth has been nothing short
of spectacular growing more than 61 in the most recent quarter to nearly 2 billion and look at
this the company's dollar base net retention rate has stayed above 120 for a long time and
perhaps more importantly its gross retention rate continues to get closer to 100 percent
currently at above 98 so how does crowdstrike rake money this is a software as a service business
that attracts new customers and convinces them to expend more as we just showed this company's
dollar based net revenue retention rate in the most recent quarter was 124 which is a very strong
number on an absolute basis now customers are expensive to acquire so that's one thing to note
however this is one of the few categories where we think custer demand is robust it will be in demand
no matter the macroeconomic cycle and the majority of revenue is recurring so does crowdstrike have a
moat we think the answer is yes the more customers this company signs up the more endpoints it has
to protect from attacks the more attacks that it encounters the smarter its engine gets to protect
all of its customers from attacks therefore the bigger its network gets the more it protects all
of its customers from future attacks that's a strong network effect of all the charts that
might convince you to invest in crowdstrike to me this is the most convincing it shows the number of
tools that customers are using those with four five or six plus tools are in the blue red and
yellow and as you can see those with at least five or six tools have just about doubled over the past
year the more tools that are added the higher the switching costs and the greater the evidence
that the company does have optionality beyond the network effect and switching costs we also think
there's some value in the brand name crowdstrike it has become the top dog in its space and we
think it resonates within the it community the company did have a counter positioning advantage
when it started as the first cloud native cyber security firm that has largely dissipated since
but it doesn't take away from the fact that the moat is expanding around the company so how the
financials looked in a word great revenue growth over the last three years has compounded a 65
annualized rate gross margin on a gaap basis is well over 70 percent and while net income
on a gaap basis has been negative net income on an adjusted basis is positive and that shows through
when we look at free cash flow which has been positive and growing for a number of years now
the balance sheet is stellar and we believe those returns on capital will turn positive soon turning
to management crowdstrike was founded by george curse a cyber security veteran many years ago and
he's still the founder and ceo today employees love working at the company giving curts and
the company high marks and insider ownership is pretty high with kurtz owning most of that
6.8 of the company over two billion dollars today so what about optionality well crowdstrike's own
history of rolling out new products shows out that this company has optionality in spades given the
growing demand for cyber security tools around the world we think this will remain true going forward
we look at operating leverage there's a lot of room for the company to improve in the years
ahead the addressable market is large and growing and crowdstrike has just captured
a small portion of it and most of its growth is organic although it has made a few acquisitions
lately so how is crowdstrike done for investors since it came public the answer is great this
stock is up over 160 from its ipo and management has a history of smashing wall street's targets
unsurprisingly crowdstrike is not focused on giving cash back to shareholders right now
they're focused on their own growth sounds great so far right well there's a whole
bunch of potential risks that investors need to be aware of if they're going to invest in crowdstrike
alongside us first and foremost is competition the cybersecurity industry is rife with competitors
and crowdstrike is squaring off against companies like fortinet and sentinel one so competition is
the number one business risk that investors need to be aware of beyond that you should be aware
that if you're buying shares there's a good chance that you're going to be deluded while this is
not uncommon for fast-growing young tech companies it is something to keep an eye on we actually
think this is a fairly low risk business however the stock is a different story and that's mostly
due to the valuation we have more to say on the valuation in a little bit and with cyber security
there is always the added caveat that if its tools get hacked or cannot protect its customers that
would be game over there's no way you can predict it but that's the price of paying in this field
yeah reputation risk is a massive long-term risk for all cybersecurity investors to be aware of so
how did the company do when they recently reported their first quarter the answer is really good
revenue grew at 61 and beat both wall street's and management's own expectations they also
reported 31 cents in adjusted earnings per share on the bottom line which blew past wall street's
targets and management's own guidance on a gap basis gross margins improved 74 while operating
and net margins were negative though that was largely because of stock based compensation free
cash flow remains positive and continues to grow net income at an absolute basis did decline and
the balance sheet remains stellar so what about looking forward management guided in the second
quarter for 515 million dollars in revenue that's 52 growth and ahead of wall street's estimates at
the time management's guidance on the bottom line is calling for 28 cents and adjusted earnings per
share that also bested wall street's target and when we look at the full year that growth rate
should continue management upped its guidance for the fiscal year to 52 growth that was ahead of
wall street's expectations management believes it's going to produce about a dollar 20 in
earnings per share on adjusted basis for the full year that was also ahead of wall street's target
so what do we watch moving forward well first and foremost is the multi-product usage the company
will break down how many customers are using four five six and just recently seven tools keep an eye
on that second watch the dollar based net revenue retention rate this is a key metric for all sas
investors to watch and so far crowdstrike has been killing it here third keep an eye on operating
margins especially sales and marketing that's a huge expense for the company and we hope that it
declines as a percentage of revenue moving forward fourth watch free cash flow so far crowdstrike has
turned into free cash flow machine and we want to see those rates continue to compound higher
over time overall we believe that the moat is widening around this company and the thesis for
investing in it is very much on track so i had a crowdstrike score on our investing checklist the
answer there is great i recently ran it through and it continues to score in the 80s which is
well into my high quality business category and this also lands in the anti-fragile category on my
framework scoring a 12 and a half so what about the company's valuation well first let's consider
where this company is likely to be in its growth cycle the numbers indicate to us that the company
is clearly in the hyper growth stage so it's focused on revenue growth first and foremost
and profits later therefore since management is so focused on revenue and gross profit the price to
sales and price to gross profit ratio are likely to be your best guides although management is
starting to focus on operating leverage so in the not too distant future the price to earnings ratio
and the price to free cash flow ratio will become more relevant speaking of that let's look at these
metrics on a price to sales ratio crowdstrike trades for about 21 times that is very high when
compared to the market at large but historically that's at a fairly reasonable valuation for this
company the price to gross profit ratio if a crowdstrike is currently hovering about 30
that's also very high in absolute terms now let's not forget that crowdstrike has been producing
growing free cash flow piles and if we look at the price to free cash flow it trades for about
75 times that number again high on an absolute term relatively low on historical term for
crowdstrike and if you look at the forward price to earnings ratio which crowdstrike does have
shares are currently trading for about 128 times that number in no world is that considered cheap
but that is one of the lowest rates on record for this business so that's why we're buying shares
of crowdstrike for our shared portfolio now you can follow us along over on common stock we're
going to be posting these slides in the next few days and we encourage you to go there and
add a public comment letting us know what you think of our decision to buy crowdstrike today
every week we look through the comments on those postings and we pick out the most insightful one
it doesn't have to agree with us in fact we love it when people push back
and the winner will get 250 dollars from common stock congratulations to connor value who made
the top comment on our slides that we posted about our decision to buy data dog last week
connor will be getting $250 from common stock thanks connor so there you have it in the next
couple of days we'll be buying $250 worth of crowdstrike stock in our public portfolio
which you can follow on common stock let us know what you think of the video below brian's out