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CrowdStrike IPO: The Buying Opportunity Starts At 7x-8x Sales

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With an innovative platform and well-known partners like Amazon (AMZN) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), CrowdStrike (CRWD) will interest IPO investors. The only feature that investors will most likely not appreciate is the share price. CRWD is trying to sell shares at 14x forward sales, which is expensive as compared to other peers. Yes, the company is growing at a more significant pace than peers. However, the valuation of CRWD cannot be that large. Notice that other cybersecurity companies trade at only 2.9x-4x forward sales.



Source: Prospectus



Source: Prospectus

Business, Partners, And Financing

Founded in 2011, CrowdStrike Holdings, Inc. offers a cloud solution for endpoint security. With a SaaS subscription-based model, the company provides a platform for threat intelligence, IT operations, and vulnerability management.



Source: Company’s Website

One of the most successful modules of CrowdStrike is Falcon Prevent, which is a light-weight antivirus with machine-learning malware prevention and capabilities:



Source: Falcon Prevent

Besides, given the large number of new vulnerabilities affecting operating systems every year, clients should appreciate Falcon Spotlight. The most appealing feature is that clients don’t need to use scanners for conducting a security assessment of performing attacks by hackers. Read the abstract below for more on what a scanner does:



Source: 45th Midwest Symposium on Circuits and Systems

CrowdStrike Holdings, Inc. uses inferential exploit attempt detection, which appears to be superior to most vulnerability scanners. Read the lines below about the company’s technology:



Source: Google Patents

Also, as shown in the image below, the company’s cloud-based system offers constant visibility:



Source: Falcon Spotlight

Many third-parties, including Gartner and Forrester, have highlighted the technology offered by CrowdStrike:



Source: Company’s Website

Besides, it is worth mentioning that large companies, including nine major banks, 44 Fortune 100 companies, and 5 of the top 10 healthcare providers, are clients of CrowdStrike. The image below provides further details:



Source: Company’s Website

CRWD sells its cloud modules through the company’s direct sales team and a network of partners. For instance, Dell (DELL) signed a go-to-market partnership that permits the sales force of Dell to offer the company’s Falcon platform.

Besides, since May 2018, clients can get access to the company’s solution Falcon Prevent via the Amazon AWS Marketplace. Also, it is worth mentioning that the company’s platform is also available for the Google Cloud Platform. There is not a lot of information about the type of agreement signed with Google. With that, the fact that clients don’t need to install on their own the CrowdStrike’s tools in the Google Cloud is favorable. It will most likely enhance future revenue.



Source: Company’s Website

CRWD financed its operations through convertible preferred stock financing. The total amount of money received approximates to $481 million with $200 million obtained in June 2018. Big venture capital firms, like Accel and CapitalG, contributed to financing the company. The image below offers further details on the matter:



Source: Cruchbase

Balance Sheet

With an asset/liability ratio of 1.2x, the company’s financial situation is very stable. Besides, CRWD reports $191 million in cash and marketable securities, which investment analysts will most likely appreciate. Bear in mind that cash in hand comprises of 44% of the total amount of assets.

As of January 31, 2019, the company reported property and equipment worth $73 million. It seems very beneficial that property increased by 80% in 2019. It means that the company is building more capacity, which increases future revenue potential. A list of assets is shown in the image below:



Source: Prospectus

On the liabilities front, it is very favorable that the company reports no financial debt. The most significant liability is deferred revenue. It approximates to $289 million, 80% of the total amount of liabilities. Most likely, financial analysts will like deferred revenue. It means that the company receives cash before even providing any service. As a result, the company does not need to contact financial institutions. See below a list of liabilities:



Source: Prospectus

As shown in the table below, the contractual obligations are not worrying either. However, investors will need to take them into account. CRWD needs to pay $73 million in less than a year, $128 million in one to three years, and $21 million in three to five years. As of January 31, 2019, the total amount of cash and marketable securities is more significant than the total amount of contractual obligations.



Source: Prospectus

110% Revenue Growth

The recent increase in revenue has been very impressive. In 2018 and 2019, revenue increased by 125% and 110%, respectively. In 2019, revenue from subscription approximated to $219 million, 87% of the total amount of revenue. Professional services were responsible for 13% of the total amount of revenue.

In 2018 and 2019, the gross profit margin approximated to 54% and 65%, respectively, which is also quite beneficial. See below more details on the top of the P&L:



Source: Prospectus

The company is still far from its break-even point. Net losses were significant, more than -$135 million in both 2018 and 2019. Besides, CRWD still reports negative FCF and negative CFO. In 2019, FCF was equal to -$58 million. Investors should notice that the company reported stock-based compensation expenses of $20.5 million in 2019. It is not a small amount. With this in mind, market participants will need to review the share count in the future. The image below offers the top of the P&L:

Source: Prospectus

Use of Proceeds

The company expects to use the proceeds from the IPO for general corporate purposes, including working capital, marketing activities, and R&D among other purposes. It is favorable that the company will not use the money to pay a debt or acquire shares from existing shareholders. Read the lines below for further details on the matter:



Source: Prospectus

Competitors

CRWD competes with the following companies:

  • McAfee, Inc.

  • Symantec Corporation (SYMC)

  • BlackBerry Cylance (BB)

  • Carbon Black, Inc. (CBLK)

With 77% gross profit margin and -3% to 30% revenue growth, competitors trade at 2.9-4x forward sales. CRWD is growing at a more significant pace than peers. With these figures in mind, the company should sell at more than 4x forward sales.

The images below offer further information on the financial stats of SYMC, BB, and CBLK:



Source: YCharts



Source: YCharts



Source: YCharts



Source: YCharts

Expected Capitalization

It is currently estimated that the initial public offering price per share will be between $28 and $30. With 196.68 million shares at $29, the total market capitalization will approximate to $5.7 billion. As shown in the table below, after the IPO, CRWD expects to have $542 million in cash. Thus, the expected enterprise value will approximate to $5.1 billion.

Source: Prospectus

In 2019, the company reported annual revenue of $249 million and 110% revenue growth. With these figures, forward revenue of $350 million is very reasonable. Therefore, the EV/Forward Revenue approximates to 14x, which seems expensive.

With a revenue of $219 million and revenue growth of 30%, CBLK has a size similar to that of CRWD. Carbon Black, Inc. sells shares at an EV/Forward Revenue ratio of 4x. With revenue growth of 110%, CRWD should not trade at 14x. The company’s revenue growth is more significant than that of competitors. However, 14x seems too high. Keep in mind that they are operating in the same industry.

CRWD will most likely not be able to grow at much more growth pace than competitors. Yes, it may do so for some time, but not for the next 20 years. With this in mind, a ratio of 7x-8x forward revenue and a stock price of $15-17 are more reasonable. At $15, CRWD could represent a buying opportunity.

Conclusion

Undoubtedly, CrowdStrike offers an innovative solution. The fact that Amazon and Google decided to provide the company’s tool is also significant. Only extremely qualified technological companies can sign such type of agreements.

With that, the company is selling shares at a costly price. CRWD believes that its shares can trade at 14x forward revenue while competitors are selling at 2.9-4x forward sales. It does not make sense.

Investors should understand that CRWD will not be able to grow at a more substantial pace than competitors for a long time. Keep in mind that peers, usually, copy in some way the software of business leaders. If clients appreciate the lack of vulnerability scanners, other software companies will soon offer a similar system. As a result, the valuation of CRWD may soon look like that of Carbon Black, Inc., Symantec Corporation, or McAfee, Inc.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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