Consumers constantly demand more convenience from their products and services. One way that happens is through digitization. To do that, businesses adopt cloud computing technology that allows them to reach customers online.
But that can be a double-edged sword. Operating in the cloud offers businesses new opportunities to generate revenue. It also exposes them to cyber threats that can originate from anywhere and can strike at any time. The threat from cyberattacks continues to grow and consulting giant McKinsey & Company predicts it could cause $10.5 trillion worth of damage to businesses per year by 2025 — a fourfold increase from 2015.
Thankfully, CrowdStrike (NASDAQ: CRWD) exists. It’s a leader in artificial intelligence (AI)-based cybersecurity, which is far more effective at thwarting attacks than traditional methods.
CrowdStrike’s stock, which is on the rise in 2023, still trades about 42% below its all-time high following the brutal sell-off in the technology sector last year. That presents a potential opportunity for investors because, according to The Wall Street Journal, analysts are overwhelmingly bullish on CrowdStrike’s prospects.
CrowdStrike was an early adopter of AI. The technology has been a fundamental part of the company’s flagship Falcon platform since 2011, which means it has been collecting data and training its models for over a decade. That’s a solid head start over competitors like SentinelOne, which also focuses on AI-powered cybersecurity tools. That company was founded in 2013.
CrowdStrike also benefits from a large customer base. The more businesses use its cybersecurity products, the more data CrowdStrike can collect, and the more accurate and effective its AI models become. CrowdStrike has over 23,000 businesses in its ecosystem at the moment, which allows the company to collect more than 2 trillion data points every day.
Protecting endpoints — in other words, any computer or device used by employees to access their organization’s systems — is a key point of focus for CrowdStrike. Why? Because that’s where a whopping 90% of cyberattacks originate. Employees’ access points are the most vulnerable part of a network because they have so many interactions with the outside world, whether it’s through email, telephone, or the broader internet. Therefore, they’re perceived as easy targets for malicious actors.
Unfortunately, not every employee can be a cybersecurity professional, so automated protection is key, and that’s where AI-powered tools shine. But AI is quickly becoming just as crucial for staff who are cybersecurity specialists.
According to Palo Alto Networks, 93% of security operations centers still rely on manual, human-led processes. As a result, employees are struggling to keep up with the sheer volume of threats, leaving 23% of security alerts completely uninvestigated. That’s unacceptable in an environment where breaches can occur in as little as 79 minutes, which means AI-based automation will almost certainly feature more heavily across the cybersecurity stack going forward.
For over a decade following the 2008 financial crisis, unusually low interest rates sent investors’ risk appetites soaring. As a result, they encouraged technology companies to adopt a growth-at-all-costs strategy, which meant investing heavily in acquiring new customers quickly, even if it led to losses on the bottom line.
That all changed in 2022, when — in response to soaring inflation — the Federal Reserve embarked on the most aggressive campaign to hike interest rates in its history. Now, investors prefer for companies to manage their expenses more carefully to generate profits, even if it means slower revenue growth.
CrowdStrike is a part of this shift. In its fiscal 2024 second quarter (which ended July 31), the company generated $731 million in revenue, representing a year-over-year increase of 37%. While that’s still a very respectable growth rate, it’s far slower than its year-ago growth rate of 58%.
Why the slowdown? CrowdStrike only increased its operating expenses by 27% year over year in fiscal 2024 Q2.
True, investing less money in areas like marketing and additional employees gives the company fewer opportunities to unlock new revenue streams.
But here’s the benefit: Given CrowdStrike’s revenue growth of 37% (against its 27% increase in operating costs), more money flowed down to the bottom line. The company had a net income of $8.4 million in fiscal Q2, and while that might seem minuscule, it was a big improvement from its $48 million net loss in the year-ago quarter.
CrowdStrike’s slowdown in revenue growth certainly hasn’t dampened Wall Street’s bullish sentiment. The Wall Street Journal tracks 45 analysts covering CrowdStrike stock, and 34 of them — 76% — gave it their highest possible buy rating.
Four analysts are in the overweight (bullish) camp, while seven recommend holding the stock. Not one recommends selling.
They have an average price target of $184, 9% above where CrowdStrike stock trades today. However, the high target is $250, which implies it could soar 48% over the next 12 months.
But that might still be conservative over the long term, because CrowdStrike believes its total addressable market could be worth $158 billion by fiscal 2026. Considering the company has just $2.9 billion in annual recurring revenue right now, its runway for growth is incredibly long. If it captures more of that growing market over time, its stock price could grow much higher.
The 42% decline in CrowdStrike’s stock price from its all-time high, combined with its continued revenue growth, has pushed its price-to-sales ratio down to about 15.2. That’s near its cheapest valuation since the company was listed publicly in 2019.
For investors with long-term time horizons, it would be hard to go wrong with CrowdStrike.
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