I went through the transcripts and slides for CRWD’s Investor Day and my conviction in them has only increased (CRWD is my largest position at 15% of my portfolio). I did a screen and CRWD is the best performing hypergrowth SaaS stock YTD by many miles. I have made plenty of mistakes but having CRWD as my largest position is not one of them (so far).
Here are some interesting points raised in its Investor Day (note: because of its Jan year end, to avoid confusion, all references to its fiscal year have been changed to calendar year):
1. Long Runway and Incubating Four Mini Crowdstrikes
While we know CRWD as primarily an EPP (Endpoint Protection Platform) company, management reveals that its 4 non-EPP products modules (Discover, Spotlight, ID protection, Log Management) are growing at >100% yoy. (e.g. ID protection growing at 350% yoy, Log management (Humio) growing at 400% yoy).
What strikes me is this: the CFO said that EACH of these modules has the potential to be as big as Endpoint Protection . While these modules are currently quite small (9% of ARR) but the embedded optionality is just INSANE.
Next, CRWD has 16K+ customers now; while the legacies (Symantec, McAfee) each have hundreds of thousands of customers at their peak. So even in its core EPP market, CRWD is nowhere near saturated.
Lastly, TAM expansion. Its current TAM is $58 bil, which it sees growing 2.2x to $126b in 2025 (based on organic TAM growth and new products in its pipeline). I don’t know how realistic this is but I do trust this management team based on its track record. Now, here’s the thing: the share of its TAM now is ~2.9% (based on 1.7b ARR). even in 2025, the share of its expanded TAM would still only be 4% (based on its $5b ARR target).
All of the above gives me comfort that CRWD has a very long remaining runway even after its achieves >$5 bil ARR target in 2025. This ties in below with why I think the market will still assign a hypergrowth multiple to CRWD in 2024/25.
2. Its Architectural Advantage
They list 3 differentiating factors in its product design: (1) single agent design with a unified backend; (2) ability to collect and stream data in real-time; and (3) collect data once and re-use in multiple modules. I am not an expert on these technical aspects; but they made the point how this design allows them to: (a) enable friction-free module expansion; and (b) add modules without draining performance and computing resources.
“Agent bloat is a real concern for CIOs”
“No new agent needs to be deployed and it helps us to cross sell without friction and drive up our Net Revenue Expansion Rate”
Do I understand in detail all the technical aspects? Not really; BUT I can see how their assertions are indeed reflected in their best-in-class margin expansion as they cross-sell their modules( “friction-free” expansion: they don’t need to spend a whole lot more as they cross-sell into their installed base so the incremental margins of doing so are very high).
3. DoD Level 4 Authorization and MITRE Evaluation
The DoD Level 4 news has been discussed on this board. Management reveals that they are only 1% penetrated in the public sector and this DoD Authorization has boosted their credentials significantly which will allow them to further penetrate the large federal sector.
On the recent MITRE Evaluation, management revealed that the malware couldn’t even get through and the evaluators had to get CRWD to turn off its Identity Protection capabilities so that they can continue the evaluation.
It’s like MITRE was testing whether the various vendors can detect and then arrest the “burglar” once he got through the gate but with CRWD, the burglar couldn’t even get through the gate in the first place.
4. Profitable Growth at Scale
I believe this is truly where CRWD has no equal. Here’s what management said: excluding the one-time IP transfer tax payment relating to Humio, its free cash flow margin in CY2021 would have been 35% rather than 30% .
Find me one other SaaS company that could deliver 35% (or even 30%) FCF margin at a 1.7 bil ARR. I looked high and low and I could not find any, whether past or present. Even megacap SaaS like Microsoft, Servicenow and Adobe could not deliver anywhere close where they were at similar scale as CRWD.
I cannot over-emphasize the importance that investors are placing on operating profits and FCF in a rising rate environment. Companies which grow their revenue at all costs but with widening losses (including many followed on this board) are being sent to the doghouse and will likely remain there until the Fed completes its hiking cycle sometime from late 2023 onwards.
5. My valuation target
The $5B ARR target for CY2025 is clearly low and management admitted that this is just an arithmetic exercise : they merely applied a 10% annual growth to “net new ARR” to arrive at that $5 bn number (their net new ARR is in fact growing at 50+%).
I am quite sure with the upcoming TAM expansion and with the 4 mini CRWD they are incubating now in their portfolio (which are growing at >100% yoy), they can do way better.
In CY25, it will still only have 4% of its expanded TAM with a lot of room left to grow.
In CY25, it should have achieved >40% or even 50% FCF margin by then (it is already at 35% FCF margin now).
What would such a company trade at in 2025?
With its multiple currently at a modest 22x EV/NTM revenue, I believe that by CY25, its multiple should remain the same or maybe compress slightly. For example, Atlassian (TEAM) is expected to deliver $3b of rev in 2022 (growing at 28% a year) with only 25% FCF margin and yet the market assigns it a 23x EV/NTM revenue multiple.
With minimal multiple compression, CRWD’s stock price appreciation will roughly track its revenue growth which means ~3x returns (5 bil ARR divided by 1.7 bil ARR) by 2025 (~3 years). This translates to about 45% annualized returns.
And I think my target above is conservative because (a) CRWD will do way more than $5 bn ARR by 2025; (b) CRWD’s current 22x multiple is itself depressed because of all the fear in the market now; and (c) I did not even include in my valuation target the tons of FCF that CRWD will generate between now and 2025.
Best regards,
Cats