It's been a doozy of a year for cybersecurity company CrowdStrike (CRWD -2.05%).
Through the first six months of the year, CrowdStrike stock rocketed upward by 50%. However, the vast majority of these gains were lost in July after a bug was identified in CrowdStrike's software -- a bug that produced widespread outages for thousands of its customers, and damage to the company's reputation.
Nevertheless, shares of CrowdStrike have rebounded strongly throughout the latter half of 2024. The stock had gained a respectable 39% on the year as of market close on Dec. 27 -- handily outperforming both the S&P 500 (^GSPC -0.43%) and Nasdaq Composite (^IXIC -0.90%).
While CrowdStrike seems to have navigated the fallout from its customers' outages this summer, I see a new challenge in its future. Below, I'll explore CrowdStrike's competitive landscape and detail why one emerging player in particular could give the company a run for its money.
Are CrowdStrike's best days in the rearview mirror? Let's find out.
Is this company whizzing by CrowdStrike?
Although the cybersecurity industry is jam-packed with competition, I'd be surprised if you're familiar with a company called Wiz. Wiz is a start-up and is currently privately held. While information about private enterprises tends to be sparse, things are a little different with Wiz given its investor roster, customer list, and impressive growth rate.
Wiz has raised billions of dollars from some of the most prestigious venture capital (VC) firms in the world, including Sequoia Capital, Andreessen Horowitz (also known as "a16z"), and Lightspeed Venture Partners. The company boasts several Fortune 100 businesses as customers, and has reportedly reached $500 million in annual recurring revenue (ARR). Earlier this year, reports swirled over rumors that Alphabet tried to acquire Wiz for $23 billion -- a deal that was turned down by Wiz's management.
While Wiz may look unstoppable, I wouldn't encourage CrowdStrike investors to run for the hills just yet. Below are some key tips that CrowdStrike investors should keep in mind.
Take the financials with a grain of salt
Broadly speaking, software companies generate revenue from two sources: sales from licenses to their platform (that is, software) and professional services. Professional services revenue tends to be nonrecurring and carries low margins. By contrast, software revenue is highly profitable, given its low cost to maintain and the recurring nature of product licenses.
Given the disparity between software and services, companies generally prefer to tout growth in ARR. However, ARR should be taken with a grain of salt.
ARR is a non-GAAP (adjusted) measure. In other words, you won't find ARR reported on an income statement in any filings with the Securities and Exchange Commission (SEC). The reason for this is that software is recognized in accordance with certain rules under generally accepted accounting principles (GAAP). By contrast, a company can effectively define ARR how it pleases. For this reason, ARR may give you an idea as to how much revenue a company is generating -- but at best, such a figure is a proxy.
While Wiz's ARR of $500 million is impressive, it pales in comparison to that of CrowdStrike. Per CrowdStrike's third-quarter earnings report, the company has eclipsed $4 billion in ARR. Furthermore, CrowdStrike is generating just shy of $1 billion per quarter in subscription revenue (not ARR).
It's hard to know how big Wiz really is. But what can be said for sure is that CrowdStrike is a much larger operation.
Understand the difference between Wiz and CrowdStrike
Another important point to be aware of is that the competition between Wiz and CrowdStrike is more tangential than direct. CrowdStrike's primary market is endpoint security: protecting laptops, work-issued phones, and other devices from malware. Wiz focuses more on cloud infrastructure -- essentially identifying security vulnerabilities in cloud workloads across Microsoft Azure, Amazon Web Services, and Google Cloud Platform.
Image source: Getty Images.
What can CrowdStrike's valuation tell us?
Although Wiz is a formidable competitor, I think the total addressable market (TAM) for cybersecurity will continue expanding exponentially -- especially in the age of artificial intelligence. To me, this suggests that the cybersecurity market will have multiple winners over the long run.
Furthermore, depending on a company's specific needs, there are many circumstances in which it could employ a dual approach to its cybersecurity applications -- using a combination of Wiz for cloud infrastructure and CrowdStrike for specific endpoints.
CRWD PS Ratio data by YCharts.
In the chart above, I've benchmarked CrowdStrike against a peer set of other leading cybersecurity companies on a price-to-sales (P/S) basis. As the chart shows, CrowdStrike is among the priciest stocks in this cohort -- practically in line with Cloudflare.
While this valuation premium could suggest that CrowdStrike stock is expensive, I see things a little differently. To me, the rebound in the stock throughout the second half of the year is a testament to the company's management and its ability to navigate the major challenge presented by the outages.
Moreover, the company's premium suggests that investors are bullish about CrowdStrike's future and, despite a heated competitive landscape, don't believe its trajectory is in jeopardy.
