The Russian invasion of Ukraine has reinforced the importance of one tech sector in particular: cybersecurity, asserts Tony Daltorio, editor of Investors Alley's Market Mavens.
The research firm Astute Analytica estimates the cybersecurity industry will grow at a compound annual growth rate of 13.4% during the forecast period of 2021 to 2027, reaching an aggregate value of $346 billion. That is equivalent to 45% of the current U.S. defense budget.
With cyber threats constantly evolving, the need for adaptability in this space lends itself to a software-as-a-service (SAAS) model.
An analysis from the technology research and consulting firm, Gartner, made it clear that a bespoke offering tailored to individual clients' needs is the preferable option in most cases. Gartner concluded that: "...the permutation of security operation needs is extensive, which means that what works for one entity is unlikely to be the best answer for another."
The end result is that this leads directly to very positive implications for recurring revenues for the companies providing the cybersecurity services.
Stocks within the sector have moved lower along with the ongoing sell-off in tech stocks. But it's worth remembering that the long-term structural drivers in the cybersecurity sector not only remain intact, but have even improved.
You could choose to invest broadly in the sector via one of the seven cybersecurity ETFs currently trading. However, I would rather try to find a company that will outperform the sector. Goldman Sachs did this recently and chose CrowdStrike Holdings (CRWD).
Goldman said that CrowdStrike's "valuation is compelling at current levels," and that while the full fiscal year 2023 enterprise/sales multiple of 17.4 "appears high," the stock trades at a lowly 0.4 times on a growth adjusted basis. Goldman concluded that the company sits "in the sweet spot of demand ahead of accelerating deterioration of the threat environment."
Goldman looks to be on to something here. CrowdStrike's last earnings report in March was outstanding, sending the stock soaring after its release. Fourth-quarter sales growth of 63% year over year came from subscriptions increasing by 66% and professional services expanding by 26%.
Annualized recurring revenue expanded 65% to $1.73 billion, and remaining performance obligations grew 67% to $2.27 billion, both year over year. CrowdStrike ended the quarter with 16,325 customers, up 65% year over year. Alongside rapid client additions, it had superb retention metrics, with dollar-based net retention of 124% and gross retention of 98%.
The good times look like they'll last. Morningstar predicts the company will have a five-year revenue CAGR of 36% thanks to "a rapidly growing customer base, more massive deals, strong retention rates, and customers buying additional security modules over time."
CrowdStrike has a leadership position in endpoint security, which is the process of protecting a network's endpoints — such as desktops, laptops, and mobile devices — from threats. Still, there is ample room for growth: the company currently has landed just 35% of business enterprises, only 3% of the mid-market, less than 1% of small-medium businesses, and also less than 1% of the public sector.
