While the Texas-based CrowdStrike (NASDAQ:CRWD) starts introducing new AI products, the real story for this relatively young company is in a good position to benefit from a surge in potential risk in private and public systems. As organizations turn to AI-based solutions this could potentially increase productivity but also generate elevated operational risks in terms of potential security threats coming from cyber-criminals. And while stock-listed companies like to boast and mention digital and technological advances such as adoption of AI solutions, the occurrence of cyber-attacks remains under-lighted while cyber-criminals increasingly can leverage their exploitation as dependency on AI and automated processes makes companies more vulnerable than ever.
Financials Look Decent
However, like many other cybersecurity firms, CrowdStrike is a growth-focused company which poses a financial risk in times when interest rates are rising and corporate bonds showing the worst results in years. In this case the risk is relatively low as the firm has more than enough liquid assets to cover all its debts. That being said, the most recent quarterly report on June 1st showed continued growth forecasts. While the numbers are strong, year-over-year revenue growth is slowing down and could be a signal of less than expected market penetration. In terms of annual recurring revenue (ARR) CrowdStrike reported 42% ARR growth dropping from 61% last year, while competitor Palo Alto Networks (NASDAQ: PANW) reported stable 60% year-over-year ARR growth in its most recent Q3 2023 report. Despite this potentially negative signal CrowdStrike did show continued free cash flow growth.
Cybersecurity Market Size Bound To Grow Exponentially
With an annual growth rate of 12.4 percent the cybersecurity market continues to grow and is expected keep growing. According to McKinsey spending on cybersecurity was around $150 billion dollars in 2021. However, the consultancy company estimated that the total addressable market and opportunity could amount up to $1.5-$2 trillion dollars (see Figure 1). And as the damage of cyber attacks will triple to over $10 trillion dollars in 2025 compared to 2015, more and more companies will feel the need to cover themselves against these malignant attacks. At the same time regulators across the globe double down on efforts to push companies to protect their (consumer) data. These developments are back winds for cybersecurity companies who successfully position themselves in this growing market.
Difference CrowdStrike and Other Cybersecurity Companies
While other cybersecurity companies such as Palo Alto Networks (NASDAQ: PANW) and Fortinet (NASDAQ: FTNT) focus on firewalls and hardware systems that need to be installed locally, CrowdStrike focuses mainly on cloud-based solutions that do not require these types of investments. Its cloud-native threat warning and protection system Falcon is significantly better than similar services offered by Palo Alto Networks. However, it should be noted that Palo Alto Networks is a much more established companies with a more diverse revenue stream than Crowdstrike.
Overall, the macro environment for cybersecurity companies seems positive on the long run, despite potential headwinds in case of economic slowdowns. At the same time all these companies have shown to be able to continue to grow, while CrowdStrike seems to be able to do this with relatively less acquisitions than other companies, which may highlight strong leadership.
Disclaimer: The author of this article holds Palo Alto Networks (PANW) stock. The information provided in this article is for informational purposes only and should not be considered as financial or investment advice. The Golden Investor is not a registered financial advisor, and the content presented here does not constitute a recommendation to buy or sell any securities or financial instruments. Always consult with a professional financial advisor before making any investment decisions. The Golden Investor and its authors shall not be liable for any losses or damages incurred as a result of any reliance on the information provided herein.