CrowdStrike Stock Soars, Outpacing Palo Alto in Cybersecurity

Key Points

• CrowdStrike is one of the leading firms in AI-powered cybersecurity.
• The firm has posted fantastic financial results over the past several years.
• It trades at a much higher multiple than its rival Palo Alto Networks, but Wall Street analysts see both firms within the fair value range.

CrowdStrike Holdings NASDAQ: CRWD is a technology firm specializing in  AI-powered cybersecurity. It has recently seen massive share price growth, up 162% in the last 12 months. Since going public in 2019, the firm has had a total return of 573% and is now the 8th largest software company in the United States. This has caused the firm to be recently added to the S&P 500 Index. Let’s get an understanding of CrowdStrike’s products, its past financial results, and its outlook.

CrowdStrike’s AI-Powered Falcon Platform

CrowdStrike operates as one reportable segment. Its core offering is the Falcon platform. Falcon is a cloud-native software that uses AI to detect and prevent cyber threats. It helps create automated workflows that give information security teams the upper hand. Real-time analysis of trillions of weekly cybersecurity events prevents threats. Falcon offers 27 cloud modules. CrowdStrike emphasizes that the platform is "lightweight," allowing devices to run the software without impacting user productivity.

Falcon continually incorporates user data into its “Security Cloud” to improve its AI algorithms. CrowdStrike dubs this feature “cloud-scale AI." Along with its deep human cybersecurity expertise, it reduces mistakes in threat identification and response. CrowdStrike believes this combination of artificial and human intelligence is essential to stay ahead of increasingly more sophisticated attacks. Bad actors use AI to enhance their capabilities, so protection must also use AI. The prevalence of hybrid and remote work models makes cloud-native software like Falcon crucial. Customers pay for Falcon through a subscription model.

CrowdStrike’s customers include government organizations and private businesses. It has typically targeted larger firms, but it is now focusing its sales teams on small and medium-sized firms. It attracts these customers through a trial period model. CrowdStrike’s competitors include Microsoft NASDAQ: MSFT, Palo Alto Networks NASDAQ: PANW, and SentinelOne NYSE: S.

CrowdStrike’s Stellar Financial Performance

CrowdStrike has posted extremely impressive results over the past several years. This includes a 30% compound annual growth rate in net income over the past three years. It currently has the highest net income margin and gross profit margin in its history. Compared to its sector, its gross income margin is in the 81st percentile. It has also decreased its total debt-to-equity ratio from 89% in 2021 to 31% today.

The firm highlighted some key metrics in its last earnings release. This includes a 33% increase in annual recurring revenue (ARR) from the previous year. ARR, derived from contractual obligations, offers revenue stability and demonstrates customer retention. This enhances the firm's earnings quality, leading to higher valuation multiples. New ARR, representing ARR added in the quarter, increased by 22%.

Another notable metric is the record free cash flow of $322 million, representing 35% of revenue. The firm now provides cybersecurity to 62 of the Fortune 100 companies and gained S&P 500 membership in a recent update. This adds to the firm's name recognition and legitimacy as a top-tier firm and will allow its shares to have increased demand due to index fund purchases.

CrowdStrike’s Outlook vs. Palo Alto Networks: Valuation, Margins, and Analyst Price Targets

Regarding valuation, margins, and financial ratios, the firm has some notable differences from its rival Palo Alto Networks. It trades at a substantially higher forward price-to-earnings multiple of 91x versus 58x for Palo Alto. Palo Alto also has a net income margin of 31%, nearly eight times higher than CrowdStrike. CrowdStrike maintains a current ratio over double that of Palo Alto and has expected earnings per share (EPS) growth over the next year, 400 basis points higher than Palo Alto. Based on these metrics, it's fair to wonder if CrowdStrike can justify its 62% higher earnings multiple versus Palo Alto.

Wall Street believes both firms are fairly valued, with the average price target for CrowdStrike implying a 1% downside versus a 4% downside for Palo Alto. Looking at EPS surprises, both firms may continue to beat expectations. EPS surprise measures the percentage difference between the consensus EPS estimate and actual EPS. Both firms have posted positive earnings surprises over the last 12 quarters. Over the past four quarters, CrowdStrike has posted an average earnings surprise of 16%, compared to 12% for Palo Alto.