Expanding Cloud Security And AI Innovations To Secure The Future And Boost Earnings

Key Takeaways

• CrowdStrike's diversified portfolio and expanded Falcon platform capabilities enhance growth potential, positioning it to capture a larger share of security budgets.
  
• Strategic partnerships and the Falcon Flex model boost customer retention and acquisition, driving sustained revenue growth through increased platform adoption and upselling.
  
• The Channel File 291 Incident has raised concerns about architecture and security, possibly affecting revenue growth, client retention, and short-term financial performance.

Catalysts

Provides cybersecurity solutions in the United States and internationally.

• CrowdStrike's expansion into cloud security, identity protection, and Next-Gen SIEM showcases its diversified portfolio and potential for resilient growth. These areas have grown over 85% year-over-year, contributing significantly to ARR and potentially increasing future revenue streams.
  
• The Falcon Flex subscription model is gaining traction by providing customers more flexibility and ease in adopting additional modules, potentially driving higher future platform adoption and sustained revenue growth through increased customer retention and upselling.
  
• Investments in innovation, such as expanding the Falcon platform's capabilities with AI-driven SOC operations and incorporating more modules, position CrowdStrike to capture a larger share of security budgets, positively impacting future ARR and earnings.
  
• Strategic partnerships with major cloud providers and systems integrators, including AWS and Google Cloud Marketplace, enhance CrowdStrike's distribution and sales channels, potentially accelerating new customer acquisition and expanding existing customer base, thus impacting revenue growth.
  
• CrowdStrike's proactive response to the July 19 incident, including enhanced platform resiliency and customer commitment packages, aims to deepen customer trust and loyalty, which can mitigate potential churn risks while encouraging long-term contracts, thereby stabilizing and potentially increasing future revenue and earnings.

Assumptions

• Analysts are assuming CrowdStrike Holdings's revenue will grow by 22.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $653.8 million (and earnings per share of $2.63) by about October 2027, up from $170.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $235 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 149.7x on those 2027 earnings, down from 435.4x today. This future PE is greater than the current PE for the US Software industry at 38.5x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Risks

• The July 19 incident, referred to as the Channel File 291 Incident, is a major event in CrowdStrike's history. The incident affected customer trust, and while CrowdStrike's immediate response and transparency were praised, the incident could lead to delayed deals and potential customer churn, impacting revenue growth and net margins.
  
• The company faces scrutiny regarding its architecture following the incident, with competitors highlighting potential weaknesses and sowing doubt among clients. If concerns about architecture and security are not fully addressed, this could affect CrowdStrike's revenue and client retention rates.
  
• CrowdStrike has introduced customer commitment packages and the Falcon Flex licensing model to retain customers, which includes offering discounts, flexible payment terms, and extended contract durations. While these packages could drive long-term loyalty, they might temporarily lead to reduced upsell opportunities and lower net new ARR, ultimately impacting short-term revenue.
  
• The potential legal exposure related to the incident remains uncertain, and while CrowdStrike maintains insurance policies and a strong cash position, litigation costs could adversely affect net margins and overall earnings if significant claims arise.
  
• CrowdStrike noted extended sales cycles and increased scrutiny in purchase decisions at higher approval levels post-incident. This implies potential delays in closing new deals and could impact future revenue growth and profitability as customer decision-making processes become more cautious.

Valuation

• The analysts have a consensus price target of $325.02 for CrowdStrike Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $540.0, and the most bearish reporting a price target of just $185.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.5 billion, earnings will come to $653.8 million, and it would be trading on a PE ratio of 149.7x, assuming you use a discount rate of 6.7%.
• Given the current share price of $302.31, the analyst's price target of $325.02 is 7.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.