The S&P500 is one of the most important indices in the financial markets.
Although it consists of only the stocks of 500 companies, it represents about 80% of all U.S. stocks by market capitalization. To join, a company must achieve a market capitalization of more than $18 billion, earn a profit in the most recent quarter, and earn a profit in the most recent twelve-month period. The share must also have sufficient liquidity.
Each quarter, a committee selects a few new stocks to join the S&P 500, while other stocks are removed to make room. The goal is to include companies that are most representative of the large-cap sector. This quarter, the committee added a cybersecurity leader CrowdStrike (NASDAQ: CRWD) to the index.
CrowdStrike will join the index on June 24 GoDaddy And KKR. In the meantime, Robert Half, ComericaAnd Illumina is removed from the index to make room.
CrowdStrike is the latest AI stock to join the all-important S&P 500, which is dominated by AI innovators. Even after rising 266% since the start of 2023, Wall Street thinks there is still room for the stock to rise. Here’s what investors need to know.
Building a competitive advantage with data and AI
More than half of the Fortune 1000 use the CrowdStrike platform to secure their data. CrowdStrike’s specialty is endpoint security, which focuses on protecting corporate devices such as computers and smartphones.
This is a naturally growing market as companies use more data and more of that data is sent over the internet and stored in the cloud. Global endpoint security spending is expected to grow at a compound annual growth rate of 13% through 2029. Management sees the total addressable market more than doubling between 2024 and 2028. And CrowdStrike is positioned to capture a larger share of the growing pie.
There are two reasons for this, both related to the existing position as the current market leader.
First of all, there are significant switching costs when it comes to changing cybersecurity software. Managers don’t want to risk cybersecurity breaches just to save a few dollars every month on software costs. That makes CrowdStrike’s services very sticky, as evidenced by its 98% gross retention rate.
Furthermore, CrowdStrike is successfully implementing a land-and-expand strategy. It is seeing a growing number of customers purchasing five or more of its services. Its cloud, identity and SIEM (security information and event management) products all achieved revenue growth of 90% or more last year. As a result, net revenue retention is well over 100% and average recurring revenue increased by 33% last quarter.
The second factor driving CrowdStrike’s growth is its investments in artificial intelligence. Artificial intelligence is fueled by data, including feedback. CrowdStrike’s platform receives more than a trillion signals every day. As such, it can train its AI to recognize and respond to threats faster than the competition. That gives CrowdStrike a kind of network advantage, resulting in a virtuous cycle. The more companies use CrowdStrike’s solutions, the better these solutions perform.
Analysts think CrowdStrike is still a buy
Several Wall Street analysts think CrowdStrike still has room to climb. Forty-seven out of fifty analysts rate the stock as buy or strong buy. Wells Fargo’s Andrew Nowinski has the highest price target on the Street and sees shares rising to $435 thanks to the partnership with Amazon. Amazon agreed to replace a variety of cloud security products with those from CrowdStrike in May.
But after the strong share price rise in recent weeks, investors may want to reconsider the stock at its current price. At the current share price, there is only about 12% upside to Nowinski’s price target. And the average on the street is much lower.
And there’s a good reason for that. CrowdStrike currently trades at an enterprise value-to-sales ratio of more than 27 times. While management expects revenue to continue to grow by more than 30% over the next year, that’s still quite expensive for the stock. That multiple is up from about eleven times in early 2023, though close to the five-year average. The fair value of the shares may be somewhere in the middle of these multiples.
CrowdStrike is a market leader with clear competitive advantages and strong revenue growth. There’s something to be said for the stock at this price, but there may be better alternatives in AI and cybersecurity in today’s market.
Should you invest $1,000 in CrowdStrike now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy has positions at Amazon. The Motley Fool holds positions in and recommends Amazon, CrowdStrike, and KKR. The Motley Fool recommends GoDaddy, Illumina, and Robert Half. The Motley Fool has a disclosure policy.
Meet the newest artificial intelligence (AI) stock in the S&P 500. It’s up 266% since last year, and Wall Street says it’s still a buy today. was originally published by The Motley Fool
