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According to Cybersecurity Ventures, global cybercrime damage costs are expected to grow by 15% per year over the next three years yet 65% of small to medium businesses don’t think they are cyberattack targets, as noted in an OpenText 2023 Cybersecurity Global Ransomware Survey but once they realize they are putting their companies at grave risk, cybersecurity stocks will have even more room to run making them great long-term buys.CrowdStrike Holdings (CRWD) is one such company that serves the cybersecurity market and its focus on cloud-native solutions and AI-driven threat detection has positioned it as a leader in endpoint security – the practice of securing entry points of end-user devices such as desktops, laptops, and mobile devices from being exploited by malicious actors and campaigns. An excellent article by GuruFocus Research (see here) highlights the strengths, weakness, opportunities and threats related to CRWD and it is referenced here along with my comparative analysis of CRWD’s valuation metrics and those of two (2) of it competitors, Zscaler Inc. (ZS) and Palo Alto Networks (PANW) and reference to four (4) of its other competitors, namely, SentinelOne (S), Fortinet (FTNT), Check Point Software Technologies (CHKP) and Rapid7 Inc. (RPD). .
Strengths
GuruFocus Research points out that CRWD’s recent Q3 (see here) financial results show that:
Its 35% rise, year-over-year, in total revenue was primarily driven by a 34% increase in subscription revenue (which constitutes 93% of the total revenue) reflect the trust and reliance customers place in CRWD’s offerings.
It achieved a milestone by reporting a net income of $26.7 million, a stark contrast to the net loss of $54.6 million in the previous year and is a testament to CRWD’s improving financial health.
It increased its gross profit margin from 73% to 75% while managing a 23% increase in total operating expenses indicating effective cost management and operational efficiency.
Its 26% increase in R&D expenses year-over-year shows its commitment to continuous research and development that is keeping the company at the forefront of cybersecurity technology
The above financial highlights underscore CRWD’s solid performance and potential for future growth reflected in its forward PEG ratio (see below) which is better than the sector median.
Weaknesses
GuruFocus Research identifies three (3) weaknesses which, if not adequately addressed, could impede CRWD’s future operations, namely:
Its 93% concentration in subscription-based revenue which exposes CRWD to customer renewal risks requiring the company to continuously demonstrate value to ensure subscription renewals and upsell additional services with any failure to do so impacting future revenue and growth prospects.
Its ongoing need to increase its operating expenses (up 19%), particularly sales and marketing, to support its customer acquisition and retention activity in the highly competitive cybersecurity sector could pressure profit margins over time.
Its need to navigate complex and diverse international data protection laws, cybersecurity regulations, and local market dynamics as it continues to expand internationally could affect its ability to scale globally and maintain consistent service quality.
Opportunities
With strengths and weaknesses come opportunities and GuruFocus Research identifies three (3) opportunities below that CRWD could realize to strengthen its market position:
CRWD’s cloud-native solutions are well-positioned to capitalize on the steady growth in the global cybersecurity market by offering scalable protection that aligns with the shift towards cloud computing and remote work environments.
CRWD’s robust R&D investment enables it to expand its product offerings and enhance existing solutions allowing it to address emerging security needs and capture additional market segments, driving further revenue growth.
CRWD has the potential to enter into strategic partnerships and collaborations with other technology providers and channel partners to extend its market reach and enhance its solution ecosystem all of which will contribute to the company’s growth trajectory.
Threats
With opportunities come threats to CRWD’s business and, again, GuruFocus Research identifies three (3) that CRWD must meet and overcome if it is to prosper in the cybersecurity sector, namely:
CRWD must continually adapt its solutions to stay ahead of sophisticated cyber threats and maintain its reputation for high-efficacy security solutions.
CRWD must successfully address changes in data protection, privacy laws, or cybersecurity regulations that could impose additional compliance costs or limit the company’s operational flexibility and, as such, impact its competitive edge.
CRWD must navigate macroeconomic uncertainties such as inflation, interest rate fluctuations, and geopolitical tensions that could affect customer spending and investment in cybersecurity while maintaining its growth momentum and managing operational costs effectively.
In addition to the above comments I provide below an analysis of CRWD’s valuation metrics and compare them with those of its primary competition, Zscaler (ZS) and Palo Alta Networks (PANW).
Valuation Metrics
CrowdStrike, with a market capitalization of $56B, is UP 128% YTD as of mid-day, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.
Its current price-to-earnings (P/E) ratio: 90.2x (357% above the sector median of 19.7x)
Its forward price-to-earnings (P/E) ratio: 79.4x (256% above the sector median of 22.3x)
Its current price-to-sales ratio (PSR): 19.5x (628% above the sector median of 2.7x)
Its forward price-to-sales ratio (PSR): 18.5x (594% above the sector median of 2.7x)
Its current price-to-expected growth (PEG) ratio: NA
Its forward price-to expected growth (PEG) ratio: 1.8x (3.9% BELOW the sector median of 1.9x)
Its current enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio: NA
Its forward enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio: 70.0x (382% above the sector median of 14.5x)
(Please note that the metrics – see definitions at end of article – change daily with the change in SMCI’s stock price.)
The Competition
How does CrowdStrike compare with its major competitors? Let’s take a look at the valuation metrics of:Zscaler (ZS): Mkt. Cap. of $29.6B; UP 78.7% YTD
Its current price-to-earnings (P/E) ratio: 92.5x (369% above the sector median of 19.7x)
Its forward price-to-earnings (P/E) ratio: 80.7x (262% above the sector median of 22.3x)
Its current price-to-sales ratio (PSR): 16.6x (518% above the sector median of 2.7x)
Its forward price-to-sales ratio (PSR): 14.1x (431% above the sector median of 2.7x)
Its current price-to-expected growth (PEG) ratio: NA
Its forward price-to expected growth (PEG) ratio: 1.9x (2.4% BELOW the sector median of 1.9x)
Its current enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio: NA
Its forward enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio: 66.6x (359% above the sector median of 14.5x)
Palo Alto Networks (PANW): Mkt. Cap. of $91.1B; UP 112.7% YTD
Its current price-to-earnings (P/E) ratio: 58.8x (198% above the sector median of 19.7x)
Its forward price-to-earnings (P/E) ratio: 52.5x (136% above the sector median of 22.3x)
Its current price-to-sales ratio (PSR): 12.3x (357% above the sector median of 2.7x)
Its forward price-to-sales ratio (PSR): 11.1x (319% above the sector median of 2.7x)
Its current price-to-expected growth (PEG) ratio: NA
Its forward price-to expected growth (PEG) ratio: 2.4x (27% above the sector median of 1.9x)
Its current enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio: 114.3x (646% above the sector median of 15.3x)
Its forward enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio: 37.3x (157% above the sector median of 14.5x)
On the basis of the above valuation metrics CrowdStrike has the best forward PEG ratio of 1.8x followed closely by Zscaler at 1.9x and then Palto Alto Networks at 2.4x. That being so noted, Palto Alto Networks has by far the best forward EV/EBITDA ratio at 37.3x compared to 66.6x for Zscaler and 70.0x for CrowdStrike. To complete your analysis of the cybersecurity sector check out SentinelOne (S), Fortinet (FTNT), Check Point Software Technologies (CHKP) and Rapid7 Inc. (RPD).
Valuation Metric Definitions
To evaluate the above companies look at the key valuation ratios referred to above and defined below:
The price-to-earnings (P/E) ratio compares a company’s share price to its earnings per share, providing a measure of relative value. A high P/E ratio could mean that a company’s stock is overvalued, or that investors are expecting high growth rates in the future.
The price-to-sales ratio (PSR) indicates the price paid for a share relative to the revenue that share generates, helping assess if a stock is valued appropriately. The mean forward PSR is considered excellent when the value falls below two (2).
The price earnings-to-growth ratio (PEG ratio)is considered to be an indicator of a stock’s true value. A PEG lower than 1.0 is best, suggesting that a company is relatively undervalued.
The Enterprise Value-to-Earnings Before Interest, Taxes, Depreciation, and Amortization ratio (EV/EBITDA) ratio considers a company’s total value, including debt and equity, relative to its earnings before interest, taxes, depreciation, and amortization, giving investors insight into profitability across companies. A high ratio means the company is overvalued, while a low ratio indicates it’s undervalued.
Media Coverage
Decoding CrowdStrike Holdings: A Strategic SWOT Insight
here
CrowdStrike Hits Fresh High: Is There Still Room to Run?
Zscaler Reports Higher Expenses, Leaves Billing Guidance Unchanged
Palo Alto Networks’ Cybersecurity Growth Outlook Disappoints — Here’s What You Need to Know
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