Cyber security: CrowdStrike's strength is in cloud computing

On the one hand the so-called on premise security. On the other the so-called on cloud. These are two approaches to cyber security, the difference between which is useful to explain the CrowdStrike activity. The first, simply put, implies that the IT infrastructure (on which security is based) is internal to the company. The second, on the contrary, requires the It mechanisms to be outside, on servers outside the company and reachable through digital networks. Both methodologies have pros and cons. However, IT security on the cloud is gaining many followers. Not only for the lower costs - due to not having the infrastructure in house - but also, and above all, for the greater scalability. Well: CrowdStrike - a new star in the firmament of computer security companies - was in fact born aiming precisely at the computer cloud, to which Artificial Intelligence (AI) was added. The company itself, in the SEC's 10-K document, says it has built 'the first true native platform - CrowdStrike Falcon Xdr - for the cloud (...) with Artificial Intelligence at its core, capable of leveraging vast amounts (...) of data to deliver modular solutions (...)'.

Against this backdrop, it should not come as too much of a surprise that the group made a bang on the stock market. Beyond the growth dynamics of its income statement and the effectiveness of its solutions, the mix of AI and cybersecurity narratives was - evidently - enough to propel the stock price. Thus, according to Seeking Alpha, as of 2/7/2024 the stock has gained 163.8% over the past year. Over the longer term, five years, it has risen by 496%. Since the beginning of 2024, the price growth stands at +50.8%. True! In general, many realities of cyber security have run very fast in recent times. The increasing digitisation of the economy - together with the explosion of Artificial Intelligence used both by hackers and for defence - has, on the one hand, accelerated the costs associated with cyber attacks (USD 9.5 trillion, those expected in 2024); and, on the other hand, pushed up investments in cyber security by companies (USD 215 billion estimated at the end of the year). In such a scenario, companies in the sector have jumped on the list: from Palo Alto Networks (+34% in the last year) to Palantir technologies (+66.4%) to ZScaler (+34%) . That said, however, CrowdStrike's acceleration on the stock market is undeniable. Far more so than many of its competitors.

Against this backdrop, CrowdStrike's multiples - which, it should be remembered, tell half the story - have risen sharply. According to Seeking Alpha, as of 2/7/2024, the ratio of price to projected non-GAAP earnings for the current fiscal year is 95.9 times. That is to say: a higher value not only than the industry median (24.2 times) - which often contains not so comparable companies - but also compared to the likes of Palo Alto Network (61.06) or Palantir Technlogies (78.25). The discourse changes - as is often the case for high-growth companies such as CrowdStrike - when the non-GAAP prospective PEG is taken into account. That is: the price-earnings ratio normalised for estimates of earnings per share over the next three to five years. Here the indicator, according to Seeking Alpha, is 2.39 compared to 2.02 for the reference segment. In other words: considering only current profitability forecasts, the stock is - according to the experts - expensive. When, however, one extends one's gaze to a broader time horizon, the shares acquire less expensive valuations. This is mainly a consequence of the expected expansion in profits. Will the climb materialise? With regard to the financial year 2024-25, CrowdStrike itself - which increased its guidance at the beginning of June - estimates a non-GAAP Earnings per Share (EPS) of between $3.93 and $4.03 (had been $3.09 at the end of 2023-24). The consensus, for its part, indicates $4.01. Then, with respect to 2025-26 and 2026-27, analysts monitored by Seeking Alpha suggest earnings per share of $4.93 and (even) $6.46, respectively. In short: as of today, momentum is expected.

Yes, expectation. Needless to say, on the one hand, forecasts become inaccurate the longer one goes; and, on the other, any estimate can be wrong (over or under) due to multiple variables. Even independent of the company's will. An example? The Fed's monetary policy. With regard to high-growth companies - such as CrowdStrike - traders use - in order to determine the target price - a model called Discount cash flow. That is: the experts - in simple words - forecast how much free cash flow the company can realise in future years and then discount it to today. The latter is influenced by, among other things, the cost of money. That is: by the reference rates set by the Fed. If the central bank defines a fall in the cost of money, then the target price could - tend to - rise; conversely, when the Federal reserve raises rates, the target price cannot be excluded from weakening. Of course! The model is much more articulated than described. Furthermore: traders also use other methodologies. Finally: monetary policy influences the market in further ways. Nonetheless, the basic reasoning remains valid and the do-it-yourselfer must exercise extreme caution when faced with hi-tech stocks that have rallied so much. Even if the fundamentals are on the upside.

As such, the company reported increased revenue and profitability in the last quarter (first quarter of the 2024-25 fiscal year). Revenue was $921 million (up 33% year-on-year) and non-GAAP diluted earnings per share stood at $0.93 ($0.57). The trend is in continuity with 2023-24, a period in which CrowdStrike had its entire year in the black (non-GAAP net profit of $751.8 million).