3 Reasons You’ll Want to Own CrowdStrike Coming Out of a Bear Market

Like many other cloud-based companies, the stock of CrowdStrike Assets (CRWD 6.11%) has plunged significantly since the fourth quarter of 2021 as investors grew increasingly concerned about the effect of inflation on high-growth stocks. However, this company has maintained excellent fundamentals during this economic storm and will likely outperform the market as the global economy rebounds.

Here are three reasons why CrowdStrike is one of the best growth companies to invest in during this market downturn.

1. Customers love the CrowdStrike Falcon platform

CrowdStrike recently announced that it added more than 1,700 net new customers at the end of its second quarter of fiscal 2023 (ended July 31) to reach a total of 19,686, up 51% year over year. ‘other.

Image source: CrowdStrike Investor Presentation.

There are two reasons why organizations gravitate to its cloud-based Falcon platform.

First, Falcon has become very popular for its ability to protect against data breaches and other attacks. Research and consulting companies like Gartner and Forrester Research consistently ranks Falcon as the best security solution in many categories. As a result, the company is seeing strong demand for its product and entered its third quarter of fiscal 2023 with a “record pipeline” of new customers wanting to join the platform.

Second, a key selling point for many companies is having a platform that can consolidate multiple security and information technology (IT) functions. Some of the benefits of using a single platform include better efficiency and less resource consumption. In contrast, older security and IT vendors tend to sell offerings that provide only one narrow solution. For years, companies have purchased multiple single-point solutions from different companies and patched them all, resulting in complexity and inefficiencies. However, Falcon is now capturing market share from these vendors by replacing this patchwork of solutions with a global platform.

By consolidating Falcon, customers can simplify their security and IT operations and get an immediate return on investment, which is crucial in an age when companies are looking at every expense.

2. The company has an outstanding balance sheet and cash flow

At the end of In July, the company had $2.32 billion in cash and cash equivalents on its books versus $740.3 million in long-term debt. Plus, it has a quick ratio of 1.7. A quick ratio greater than one indicates that a company is able to pay all of its current liabilities within a year, or in other words, a balance sheet built to withstand short-term economic disruptions.

The graph below shows that the company owned more than 50% free movement of capital (FCF) in both its last full fiscal year and its current fiscal year to date.

A chart shows CrowdStrike's strong free cash flow generation.

Image source: CrowdStrike Investor Presentation.

A strong FCF is essential in a downturn for two reasons. First, many view FCF as the ultimate measure of a company’s financial performance. During major recessions, investors often quickly sell companies without FCF and buy companies with positive and growing FCF.

Second, the FCF represents the cash available for the company to repay creditors, pay dividends, or expand its business. Since CrowdStrike currently does not pay dividends and has enough cash to pay off all or some of its debts, it has a lot of financial flexibility.

3. The company continues to execute its investment plan

Although internet security remains a high-growth area during this downturn, many cybersecurity start-ups are struggling and have laid off much of their workforce. For example, the cybersecurity company Iron Net laid off 17% of its workers in June. This is just one example of many high-flying cybersecurity companies taking the reins out of their growth plans.

By contrast, CrowdStrike hasn’t laid anyone off yet and already said on its last earnings call that it will continue to hire in 2022 as its growth plans remain intact. Continued investment in research and development, sales and marketing, and expansion into new markets will help the company gain share from struggling competitors that cannot keep up during a downturn.

The company is not immune to a recession

While CrowdStrike may be resilient to a weak economy, it’s not immune to a recession, and there’s a reason risk-averse investors steer clear of this stock.

CrowdStrike is selling at a price-to-sales (P/S) ratio of 23.9, which is very high compared to the broader IT processing and cloud services sector’s P/S ratio of 4.4. As a result, if economic conditions became truly dire and Crowdstrike’s growth slowed, the market reaction would likely be swift and severe.

However, if you can look past the potential volatility by focusing long-term on a company that can outperform the market coming out of this downturn, CrowdStrike is a great bet.

Rob Starks Jr holds positions at CrowdStrike Holdings, Inc. The Motley Fool holds positions and recommends CrowdStrike Holdings, Inc. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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