Via SeekingAlpha.com

CrowdStrike’s (CRWD) cloud and endpoint security bets are paying off. Besides competitive pressure and overvaluation worries, nothing stands in the way of CrowdStrike’s momentum. CrowdStrike has booked the front row on major cloud platforms. Innovating to create new solutions will drive its land and expand strategy to ensure margins improvement. Investors with a huge risk appetite should consider taking a long-term position.

Demand (Rating: Bullish)

Globalization-ARR-ACV-Cloud-Displacement-Cyber Attacks

Source: CrowdStrike

CrowdStrike’s cloud focus means its products can be deployed to provide cybersecurity solutions for enterprises across the globe. This capability has been strengthened by the growth of distributed teams accessing critical business and personal apps from remote networks. CrowdStrike’s cloud focus also means it is able to imagine new use cases for its products. These new use cases result in solutions that are offered via new modules attached to its platform. The need to prevent data breaches and ransomware attacks in addition to the need to deploy security solutions that scale means CrowdStrike can easily cross-sell new security modules. This development has boosted CrowdStrike’s growth metrics. Metrics like ARR (annual recurring revenue), ACV (average contract value), and DBNRR ( dollar-based net retention rate) have been above expectations. Customers don’t realize how vulnerable they are when migrating their workloads to the cloud. Since CrowdStrike has the solutions to protect these cloud workloads, by leveraging the power of its brand, sales reps are able to make a case to customers about the need to protect new cloud workloads.

Business/Financials (Rating: Bullish)

Platform-Threat Intelligence-Land & Expand-Margins-FCF-Liquidity

Source: Author (using data from Seeking Alpha)

CrowdStrike has succeeded in using its platform to drive its land and expand strategy. It is releasing endpoint modules to solve cloud security solutions in a low friction way. CrowdStrike is succeeding due to its intense focus on delighting its customers.

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Investors will realize that driving margins isn’t simply about releasing new modules. It is about anticipating new problems when protecting cloud workloads and endpoints.

Going forward, margins will continue to benefit from product expansion. As customers buy multiple products, ACV will grow and CrowdStrike will have more free cash flow to fund its operations. This means margins and cash flow will be more accretive to CrowdStrike’s valuation going forward.

Macro/Competitors (Rating: Neutral)

Integrations-Acquisitions-Partnerships-International Expansion-Brand

CrowdStrike has consistently leveraged the power of its brand to separate itself from other players in the endpoint and cloud security space. This strategy will continue to help CrowdStrike in the near term. Its ability to partner and integrate with the right players will drive product stickiness. In the near term, competitive pressure won’t be a drag on its growth or momentum factor until a bigger innovator shows up.

Macro challenges will come from SMBs in sharing economies and countries with weak economic stimulus packages to buffer the headwinds from COVI9-19. In the long term, these headwinds will fade out.

Investors/Valuation (Rating: Neutral)

Network Effect-Economies Of Scale-Switching Cost-Momentum-Analysts

Source: Author (using data from Seeking Alpha)

The market is bullish on cloud stocks. Unlike on-prem solutions, the complexity of workloads in cloud platforms and infrastructures means more technology solutions can be built to deliver more value to cloud users. Investors don’t want to wait for these solutions to be built. It’s just easier to bet on top cloud stocks innovating on cloud platforms. These bets have driven multiple expansion.

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Source: Author (using data from Seeking Alpha)

CrowdStrike’s niche positioning in endpoint and cloud security means it already has deep knowledge in innovating for cloud workloads. Since the world will witness more migration to cloud platforms, CrowdStrike’s growth factor will continue to benefit from this trend. Its momentum factor is currently strong and analysts are updating their ratings because no one can fully imagine the loads of new cloud solutions that will be invented in the coming years. Since cloud solution providers leverage cloud infrastructure for their production cost, they are able to deliver huge gross margins. CrowdStrike’s brand positioning means selling more modules will lead to future margin expansion as customer acquisition cost normalizes.

Tying all of these possibilities and potentials, investors will realize the huge optionality that CrowdStrike has to create more value. Taking a short-sighted view is dangerous.

Risks

Demand-side risk factors aren’t a problem. Consumers love CrowdStrike’s cloud-focused solutions. CrowdStrike is innovating faster than customers can digest the different ways cloud data lanes expose their resources to attacks. This creates a market expansion gap that sales reps have to constantly backfill.

CrowdStrike’s ability to land deals with multiple modules means deferred revenue will assist its liquidity. EPS dilution from share-based compensation isn’t a worry when multiple expansion is supportive of valuation.

It’s tough for activities from competitors to pose a major threat to CrowdStrike because customers want great cloud security solutions. CrowdStrike’s success in the congested endpoint space is due to its consistent delivery of great products.

Source: Author (using data from ycharts)

On the macro front, there will be occasional elongated sales cycles from SMBs with liquidity worries. In the long run, every enterprise depending on cloud platforms for cloud security solutions will have to extend their wallets to top cloud security players.

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In terms of valuation risk, CrowdStrike’s valuation is stretched. This remains a huge risk factor for short-term investors. This has also driven its daily return volatility and short interest.

Conclusion (Overall Rating: Hold)

CrowdStrike has what it takes to pull away from the congestion in the endpoint security space. The market has baked in future growth and innovation potentials. Investors with a huge risk appetite will find CrodwStrike attractive for a long-term buy and hold strategy. Value investors should wait for a pullback which could be triggered by occasional billings or EPS expectation mismatch during earnings season.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.