The S&P500 index is a well-known benchmark composed of about 500 shares of American companies, large and profitable. Cloud-based cybersecurity company CrowdStrike (NASDAQ: CRWD) will be recorded from June 24. And this company definitely deserves the honor of being included.
CrowdStrike went public in 2019. And during the company’s 2019 fiscal year (which ended in January of that year), it generated revenue of just $250 million. Fast forward to fiscal year 2024 (which ended in January of this year), and it generated revenue of more than $3 billion. In short, CrowdStrike has grown exceptionally as a publicly traded company in just five years.
The quality of CrowdStrike’s growth is also notable. There are companies that have grown by a similar amount, but few have achieved massive profitability at the same time. Free cash flow has skyrocketed. And in the first fiscal quarter of 2025, CrowdStrike achieved a massive 35% free cash flow margin – that’s incredible.
However, you could criticize CrowdStrike as an investment because of its high valuation. Paying too much for an investment, even for shares of a Awesome business – can have a negative effect on future returns. And trading at a price-to-sales (P/S) ratio of nearly 30 and a price-to-free-cash-flow ratio of nearly 100, CrowdStrike stock is expensive these days.
Frankly, it could still work out well for investors. The cybersecurity space offers enormous opportunities and CrowdStrike is one of the best players. Therefore, its long-term growth and profits may justify its valuation.
For investors concerned about this valuation risk today, website company GoDaddy (NYSE:GDDY) will be included alongside CrowdStrike in the S&P 500. And it’s a much better buy today, as I’ll explain.
Why Investors Should Watch GoDaddy Stock
Over the past three years, GoDaddy stock has quietly risen about 60%, which is almost double the 31% return for the S&P 500. And when investors think about the material things that make stocks go up, stocks go up from GoDaddy for all the right reasons. .
For starters, GoDaddy continues to grow even though it has been around for a while. In 2022, the company’s revenues rose 7% year over year, and in 2023 they increased 4%. In the first quarter of 2024, sales grew by a further 7% compared to the previous year period.
Some investors would scoff at a single-digit growth rate for GoDaddy. And taken on its own, it’s true that the company’s revenue growth hasn’t delivered much. But free cash flow has done much better because of the question of where the growth is coming from – more on that later. Consider that free cash flow growth exceeded revenue growth in 2022, 2023, and in the first quarter, which is a solid trend right now.
Additionally, by using cash flow to buy back shares, GoDaddy has reduced its share count, increasing free cash flow per share. This is important to individual shareholders because it makes their ownership interests more valuable.
In summary, GoDaddy has reduced its share count, increased revenue, and increased free cash flow. And free cash flow per share rose faster than the share price, meaning its recent market-losing performance is justified.
The real question for investors today is whether GoDaddy can continue to grow revenue and free cash flow while reducing its share count. And I believe the answer is yes.
GoDaddy makes most of its money from domain name services – this is the top-of-mind service, and 92% of its customers bought a domain name from the company in 2023. However, GoDaddy is increasingly offering services for starting, growing, and marketing a business, including products for building websites, accepting payments, and more.
These complementary products are a no-brainer for GoDaddy and have increased profit margins – explaining why free cash flow is growing faster than revenue. And the company’s recent artificial intelligence (AI) tools are further driving adoption of its newer products, according to management.
As a result, GoDaddy expects free cash flow growth to continue to outpace revenue growth. Management expects to generate cumulative free cash flow of $4.5 billion through the end of 2026. In addition, management is still authorized to repurchase $1.1 billion worth of shares starting at the end of the first quarter to further reduce the number of shares.
Trading at just 20 times free cash flow, GoDaddy stock is a much better buy than CrowdStrike stock, as the chart below shows.
It’s not as exciting or as fast-growing as CrowdStrike. But GoDaddy is growing its free cash flow at a respectable pace, and its valuation is reasonable. This combination of profitable growth and reasonably priced stocks could deliver strong stock returns going forward. That’s why I believe investors should take a closer look at GoDaddy stock now.
Should You Invest $1,000 in GoDaddy Now?
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in CrowdStrike. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.
CrowdStrike Stock is adding to the S&P 500. But this other new S&P 500 addition could be a better buy. was originally published by The Motley Fool
