Don’t overestimate the growth potential of cloud-based cybersecurity leaders.
If you’d invested $10,000 in CrowdStrike’s (CRWD -1.74% ) initial public offering (IPO) in June 2019, your shares would be worth roughly $88,000 today. The cybersecurity company shocked the market with the rapid growth of its cloud-native platform.
CrowdStrike’s 777% gain dwarfed the First Trust Nasdaq Cybersecurity ETF’s 111% gain over the same period, but that alone probably wouldn’t make you a millionaire unless you invested $114,000 at the IPO.
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Can CrowdStrike still generate millionaire-making returns for investors who missed out on the last five years’ profits? Let’s see how much a new $10,000 investment in CrowdStrike could grow over the next decade.
CrowdStrike’s growth is slowing
Many cybersecurity companies still run their services through on-site security systems that are expensive, take up a lot of space, consume a lot of power, and require regular maintenance. CrowdStrike’s flagship security platform, Falcon, replaces all those cumbersome on-site appliances with a subscription-based, cloud-native service.
This ecosystem stickiness makes it easier for CrowdStrike to cross-sell more cloud-based modules and drive higher average revenue per customer: As of the end of fiscal year 2024 (ending January this year), about 64% of customers were using at least five modules, compared to just 33% at the end of fiscal year 2020.
That’s why CrowdStrike has grown so fast since going public. From fiscal year 2020 to fiscal year 2024, the company’s subscription customer base grew more than five-fold, from 5,431 to 29,000. The company’s revenue grew at a compound annual growth rate (CAGR) of 59%, and its adjusted subscription gross margin expanded from 75% to 80%. And it achieved profitability on a generally accepted accounting principles (GAAP) basis in fiscal year 2024.
While these numbers are impressive, the company’s growth is slowing. The company expects revenue to grow just 27%-28% in fiscal 2025, compared to 36% growth in fiscal 2024 and 54% growth in fiscal 2023. This would be the company’s slowest annual growth rate since its IPO. Analysts expect the company’s revenue to grow at a compound annual rate of 24% from fiscal 2024 to fiscal 2027.
The slowdown can be attributed to three major challenges. First, macroeconomic headwinds are causing many companies to scrutinize their software spending. Second, CrowdStrike faces stiff competition from more diversified cybersecurity companies such as Palo Alto Networks and Fortinet, as well as smaller cloud- and artificial intelligence (AI)-driven rivals such as Zscaler and SentinelOne.
Finally, CrowdStrike’s brand was tarnished earlier this year when a faulty software update caused a global IT outage. The company has already lowered its full-year outlook in the wake of the disaster, but this mistake could make it even harder to attract new customers.
Can CrowdStrike generate billionaire-making profits?
CrowdStrike’s business is maturing, but the company still trades like a high-growth stock, at 15 times next year’s sales and 76 times projected non-GAAP earnings. On a GAAP basis, it looks even more expensive, at 343 times next year’s earnings.
Palo Alto and Fortinet, which are both slower growing than CrowdStrike, trade at 53 and 33 times forward adjusted earnings, respectively. Zscaler, which is growing slightly slower than CrowdStrike, trades at a lower forward price-to-earnings (P/E) multiple of 60.
As CrowdStrike’s growth slows, it may be difficult for the company to maintain these premium valuations. Under an optimistic scenario, CrowdStrike could grow revenue from $3 billion in fiscal 2024 to $19 billion in fiscal 2034 at a 20% compound annual growth rate.
If CrowdStrike were trading at 15x sales by then, it would be worth $285 billion, but that’s only nearly four times its current market cap. That’s a decent gain over a decade, but it’s only going from $10,000 to $40,000 or so. And if it continues to lose momentum and its valuation falls, the return may not be as impressive.
For now, CrowdStrike doesn’t seem likely to generate billionaire-making profits, and while it’s still well-positioned for the long-term expansion of the cybersecurity market, investors should remain realistic about the company’s long-term growth potential.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends CrowdStrike, Fortinet, Palo Alto Networks, and Zscaler. The Motley Fool has a disclosure policy.
