CrowdStrike (CRWD)

Cybersecurity company CrowdStrike (NASDAQ:CRWD) reported revenue ahead of Wall Street’s expectations in Q4 CY2024, with sales up 25.2% year on year to $1.06 billion. The company expects next quarter’s revenue to be around $1.10 billion, close to analysts’ estimates. Its non-GAAP profit of $1.03 per share was 19.9% above analysts’ consensus estimates.

Company Overview

Founded by George Kurtz, the former CTO of the antivirus company McAfee, CrowdStrike (NASDAQ:CRWD) provides cybersecurity software that protects companies from breaches and helps them detect and respond to cyber attacks.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. As the volume of internet enabled devices grows, every device that employees use to connect to business networks represents a potential risk. Endpoint security software enables businesses to protect devices (endpoints) that employees use for work purposes either on a network or in the cloud from cyber threats.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, CrowdStrike’s 39.7% annualized revenue growth over the last three years was exceptional. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, CrowdStrike reported robust year-on-year revenue growth of 25.2%, and its $1.06 billion of revenue topped Wall Street estimates by 2.4%. Company management is currently guiding for a 19.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 21.1% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is commendable and implies the market is baking in success for its products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

CrowdStrike’s ARR punched in at $4.24 billion in Q4, and over the last four quarters, its growth was fantastic as it averaged 29% year-on-year increases. This performance aligned with its total sales growth and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes CrowdStrike a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

CrowdStrike is very efficient at acquiring new customers, and its CAC payback period checked in at 28.2 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give CrowdStrike more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

CrowdStrike’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 74.9% gross margin over the last year. Said differently, CrowdStrike paid its providers $25.08 for every $100 in revenue.

CrowdStrike’s gross profit margin came in at 74.1% this quarter, down 1.2 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

CrowdStrike’s expensive cost structure has contributed to an average operating margin of negative 3% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Analyzing the trend in its profitability, CrowdStrike’s operating margin decreased by 3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. CrowdStrike’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

CrowdStrike’s operating margin was negative 8.1% this quarter.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

CrowdStrike has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 27% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

CrowdStrike’s free cash flow clocked in at $240.8 million in Q4, equivalent to a 22.7% margin. The company’s cash profitability regressed as it was 10.7 percentage points lower than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict CrowdStrike’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 27% for the last 12 months will increase to 27.3%, giving it more flexibility for investments, share buybacks, and dividends.

Companies with more cash than debt have lower bankruptcy risk.

CrowdStrike is a well-capitalized company with $4.32 billion of cash and $788.9 million of debt on its balance sheet. This $3.53 billion net cash position is 4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly CrowdStrike blew past analysts’ billings expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its revenue guidance for next year suggests a significant slowdown in demand and its revenue guidance for next quarter was in line with Wall Street’s estimates. Overall, we think this was still a solid quarter with some key areas of upside. The stock remained flat at $355.10 immediately after reporting.

Updated: May 21, 2025 at 10:01 PM EDT

Are you wondering whether to buy CrowdStrike or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

There is a lot to like about CrowdStrike. First of all, the company’s revenue growth was exceptional over the last three years. And while its declining operating margin shows it’s becoming less efficient at building and selling its software, its ARR has surged, showing its fundamentals are improving because it’s becoming a more predictable business. Additionally, CrowdStrike’s bountiful generation of free cash flow empowers it to invest in growth initiatives.

CrowdStrike’s price-to-sales ratio based on the next 12 months is 22.4x. A lot of good news is certainly baked in given its premium multiple, but we’ll happily own CrowdStrike as its fundamentals really stand out. We’re in the camp that investments like this should be held for at least three to five years to negate the short-term price volatility that can come with high valuations.

Wall Street analysts have a consensus one-year price target of $414.33 on the company (compared to the current share price of $434).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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