Inflation, rising interest rates, geopolitical developments, and concerns about the near-term economic outlook have combined to create broad-based selling pressures for growth stocks. Many strong companies with tremendous long-term expansion potential have suffered big valuation pullbacks in conjunction with this trend. That’s a dynamic that investors can use to their advantage.
While it’s impossible to say when exactly the next bull-market phase will begin, putting your money behind the best of today’s beaten-down growth stocks and holding for the long term could be a path to life-changing returns. With that in mind, read on for a look at one top stock trading down 61% from its peak that I believe is on track to be a massive long-term winner.
This security threat can’t be ignored
Gaining access to the internet networks of companies and institutions can be incredibly lucrative for cybercriminals. And as Berkshire Hathaway co-chairman Charlie Munger once said, “Show me the incentive, and I will show you the outcome.”
While access can sometimes be gained through attacking the network directly by software-based cyberattacks, bad actors can also try to breach a network through connected hardware. Unless adequately protected, hackers can use endpoint devices including computers, mobile hardware, and servers as weak points for attacking networks.
Once they’ve gained access to networks, bad actors can steal valuable details, hold ransom access to crucial servers and information, or alter data throughout the system to cause myriad problems. Research from IBM suggests that it takes companies an average of 197 days to discover a network breach and up to 69 days on average to contain it. Breaches can cause problems such as loss of customer trust, decreased productivity, financial losses, and legal liability.
The good news is that organizations can minimize their exposure to endpoint-based cyberattacks. That’s where CrowdStrike (CRWD 3.69%) comes in.
A clear-cut category leader with a strong foundation
CrowdStrike is the leading provider of cloud-based endpoint protection software. The company’s Falcon platform uses artificial intelligence to identify and responds to attacks, and it learns and evolves with each new threat that it comes into contact with.
CrowdStrike managed to add 1,460 net subscription customers last quarter, representing 44% growth compared to the end of the prior-year period and bringing its total subscription customer count to 21,146.
Once a customer starts using CrowdStrike’s services, there’s also a good chance that they will move on to purchase additional software modules from the company. In the third quarter, the percentage of customers using five or more, six or more, and seven or more modules came in at 60%, 36%, and 21%, respectively. The number of customers in each cohort grew 55%, 66%, and 81%, respectively, compared to the end of the prior-year period.
Customers that were already using the company’s platform increased their spending by more than 20% year over year in Q3. Through the combination of increased spending from existing customers and new customer additions, CrowdStrike’s revenue jumped 53% compared to the prior-year period to reach $581 million.
The cybersecurity specialist also ended last quarter with $2.47 billion in cash and short-term equivalents and zero debt, giving it a robust balance sheet to work with going forward. In addition to providing a financial foundation for funding internal growth initiatives, the company’s cash pile could be put to use for acquisitions that could push the business into exciting new product categories. And there’s some evidence that CrowdStrike will make big moves pushing into new service offerings.
Demand catalysts and an incredible long-term growth opportunity
CrowdStrike estimates that it had a total addressable market of roughly $76 billion in 2022, but it expects to have a TAM of $158 billion in 2026. What’s driving this incredible growth of the expected addressable market (TAM) size? In addition to continued expansion for its existing product and service categories, management anticipates that new product launches and initiatives and as-of-yet untapped opportunities in cloud security will lead to explosive TAM growth in the coming years.
Despite the stock falling 61% from its high, CrowdStrike still has a highly growth-dependent valuation — with shares valued at roughly 56 times expected forward earnings and nine times expected sales. While this heavily forward-looking valuation may deter some investors in light of bearish pressures that have shaped trading for growth stocks over the last year, this is a case where I think investors can benefit from going against the grain.
Rather than waiting until it’s clear that the next bull market has arrived, I believe CrowdStrike stock currently presents an opportunity while still trading down precipitously from its high. I plan to buy shares before the company publishes its next earnings report early in March and expect that the cybersecurity leader will deliver incredible returns over the long term.