Down 40% From Its High, Is CrowdStrike Stock a Smart Buy?

2021 ended up being a rough year for many growth investors. In the latter half, supply chain constraints helped drive the consumer price index (a popular proxy for inflation) to a 39-year high, causing the Federal Reserve to accelerate the taper of its asset purchase program. More recently, rising bond yields and talk of interest rate hikes have added fuel to the fire, accelerating the sell-off of many richly valued stocks.

Unfortunately for shareholders, CrowdStrike (CRWD 0.14%) was caught in the fray, and the cybersecurity company has seen its share price fall 40.1% from its all-time high. However, longtime investors know that volatility is the price of admission when dealing in the stock market, especially where growth stocks are concerned. On the bright side, that volatility often creates buying opportunities.

With that in mind, is CrowdStrike stock a smart buy right now? Here's what you should know.

Image source: Getty Images.

Cybersecurity is critical

CrowdStrike specializes in endpoint and cloud workload protection. Its platform comprises 21 software-as-a-service modules, each of which helps clients safeguard devices and applications across on-premise, virtualized, and cloud-based environments. CrowdStrike also provides security assessment and incident response services, helping organizations identify vulnerabilities and resolve active cyberattacks.

While cybersecurity has always been important, remote work and digital transformation have made effective protection a necessity. The rise of cloud computing, the proliferation of connected devices, and the digitization of various business processes have all contributed to an uptick in attacks. And the problem is still getting worse. In fact, damages inflicted by cybercrime will total $10.5 trillion annually by 2025, up from $6 trillion in 2021 and $3 trillion in 2015, according to Cybersecurity Ventures.

To that end, CrowdStrike puts its addressable market at $54 billion this year, but that figure could more than double by 2025 as the company continues to grow its portfolio. 

CrowdStrike is the gold standard

CrowdStrike differentiates itself in a few important ways. First, its cloud-native platform eliminates the need to buy and maintain on-site security infrastructure. It also allows CrowdStrike to crowdsource data from across its ecosystem of protected devices. That information is fed through AI models, helping clients predict and prevent even the most sophisticated attacks. To that end, CrowdStrike has earned a reputation for industry-leading threat detection.

Second, many vendors require clients to install more software with each additional product, burdening the endpoint (e.g. desktop, server). By comparison, CrowdStrike delivers all of its software through a single sensor that consumes no more than 1% of the device's processing power.

Third, CrowdStrike's platform offers a high degree of automation, far more than any competing product. That makes its software easy to deploy and simple to use, driving the total cost of ownership down. And when that's not enough, CrowdStrike's Falcon Complete product is a fully managed detection and response service backed by a $1 million guarantee. In other words, CrowdStrike's team of threat hunters will assume full control over a client's security, allowing the organization to offload the burden entirely.

Finally, several research companies and independent testing organizations have recognized CrowdStrike as an industry leader over the past year, including Gartner, Forrester Research, and SE Labs. And those accolades have fueled strong demand and an impressive financial performance.

In the most recent quarter, CrowdStrike reached 14,687 customers, up 75% from the prior year. At the same time, the company has kept its retention rate above 120% for the last 15 consecutive quarters, meaning the average customer spends at least 20% more each year. Not surprisingly, CrowdStrike's top line is growing quickly, and the company is now free-cash-flow positive.

Source: YCharts. TTM = trailing 12 months. CAGR = compound annual growth rate. Note: Q3 2022 ended Oct. 31, 2021.

Looking ahead, CrowdStrike's latest module -- Extended Detection and Response (XDR) -- could be a significant growth driver. XDR unifies security data across endpoints, networks, cloud infrastructure, and email with a single platform, helping clients investigate and respond to threats more quickly.

Concerns about valuation

Currently, CrowdStrike trades at 31 times sales, a figure that sits in the middle of its historical range. By comparison, its price-to-sales ratio peaked at 66 in January 2021. Even so, it would be wrong to call this stock cheap, and shareholders should expect volatility.

However, for risk-tolerant investors, this stock does indeed look like a smart buy right now. CrowdStrike has a strong brand name, a resilient competitive position, and a smart growth strategy, all of which should help the company capitalize on its massive market opportunity. In fact, I wouldn't be surprised to see CrowdStrike grow fourfold over the next decade.