The latest rebalancing for the S&P500 took place in mid-June, and cybersecurity, darling CrowdStrike (NASDAQ: CRWD) earned a spot in the esteemed index. While joining the S&P 500 is an impressive milestone, it’s not reason enough to buy a stock. Nevertheless, CrowdStrike is firing on all cylinders, and I think the best days are ahead.
Let’s take a look at the company’s progress and explore why it is now a lucrative opportunity for long-term investors to own CrowdStrike.
CrowdStrike is in a class of its own
CrowdStrike operates in the cybersecurity industry and specializes in threat detection and endpoint security through its flagship platform, called Falcon. Although the cybersecurity landscape is full of competition, CrowdStrike stands out as the winner, thanks to its proven ability to cross-sell.
For the company’s first quarter of fiscal 2025 (ended April 30), nearly two-thirds of all CrowdStrike customers used five or more products. Additionally, new deals with eight or more products increased 95% year-over-year. By selling multiple products to its customer base, CrowdStrike can expand its recurring revenue base while achieving strong earnings growth.
For the quarter ended April 30, CrowdStrike’s annual recurring revenue (ARR) increased 33% year over year to $3.7 billion. Additionally, the company posted net income of $43 million in the first quarter, compared to just $0.5 million in the same period last year.
The combination of increasing sales and profit growth is encouraging and I think we are just getting started.
The party is just getting started
In 2022, CrowdStrike released an investor presentation showing a total addressable market size (TAM) of $75 billion at the time. Management further explained that with the company’s current product portfolio at that time, TAM could reach $97 billion by 2025 and $158 billion by 2026 if CrowdStrike executes on its new product roadmap.
It’s clear that a lot has changed in the past two years. Not only are cybersecurity protocols more important than ever to combat hackers and protect data and privacy, but advances in artificial intelligence (AI) are also finding their way into virtually every use case in the tech world.
According to the company’s most recent investor presentation, CrowdStrike now believes its TAM is $100 billion. Additionally, management sees the addressable market growing to $225 billion by 2028 as generative AI increasingly becomes part of cybersecurity tools.
Is CrowdStrike a good stock to buy now?
CrowdStrike has proven that it can compete in an intense cybersecurity market and do so very profitably. Furthermore, as demand for AI continues to rise, the company should be positioned to benefit from long-term tailwinds.
The only downside to investing in CrowdStrike is its expensive valuation. The stock currently trades at a forward price-to-earnings (P/E) ratio of 96 and a price-to-free-cash-flow (P/FCF) multiple of 93.
Simply put, the stock is expensive — even for growth investors. That said, I still think CrowdStrike is an attractive opportunity.
The rate at which the company And The addressable market is growing, and it shouldn’t go unnoticed. Cybersecurity itself is a big market, and CrowdStrike has carved out a formidable position, despite the fact that there are much larger, better-capitalized players. Furthermore, as AI has become increasingly important to businesses of all sizes, CrowdStrike fits neatly at the intersection of two of the tech sector’s hottest end markets.
Considering the company’s ARR of $3.7 billion represents just 1.6% of the current estimated market size, CrowdStrike still has a long way to go before the business matures or stagnates.
I believe CrowdStrike’s premium valuation is justified and I’m optimistic that the company can continue to generate strong revenue growth, complemented by robust cash flow. Long-term investors may want to consider a position in CrowdStrike as a hedge against other AI stocks. It’s a leading company among cybersecurity opportunities.
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.
Should you buy CrowdStrike stock now that it’s part of the S&P 500? was originally published by The Motley Fool
