Here Presents My Favorite Cybersecurity Investment for 2025
Investing in cybersecurity has proven to be a lucrative venture, even during economic downturns. Amongst various options, my personal favorite is CrowdStrike (CRWD -1.60%). This company has established itself as a front-runner in the industry and is highly regarded in numerous aspects. But is it a wise investment at the moment?
CrowdStrike's offerings in cybersecurity are diverse. It began with endpoint security, shielding network entry points like laptops from digital intruders and employing AI to distinguish normal activity from threats. However, the company's scope has expanded significantly beyond this. Currently, it boasts nearly 30 modules, granting customers access to a plethora of capabilities via the CrowdStrike Falcon platform. These capabilities span from exposure management to data protection to cloud security.
Each additional module adds to CrowdStrike's revenue, and multiple module adoption is crucial to its growth. This strategy has been successful, with 66% of customers utilizing at least five modules and 31% incorporating seven or more. This marks a significant improvement from the previous quarter, where 63% of clients used five modules, and 26% employed seven.
This growth in both existing customer expansion and new client acquisition contributed to an 27% increase in annual recurring revenue (ARR) to $4.02 billion for the company's fiscal 2025 third quarter (ended Oct. 31). Management anticipates reaching $10 billion in ARR by the end of fiscal 2031, alongside an operating margin of 28% to 32% and a free cash flow margin of 34% to 38%, all on a non-GAAP basis.
This robust business model is likely to generate substantial returns for shareholders. However, it's still several years away. So, is CrowdStrike worth investing in now?
The stock is not inexpensive
CrowdStrike often toggles between profit and loss in any given quarter. Consequently, using earnings-based valuation methods is complicated. Instead, assessing the company based on free cash flow (FCF) and sales presents a clear picture: CrowdStrike's stock is highly overvalued.
At 88 times FCF and 26 times sales, CrowdStrike is laden with high expectations. This could make it an unattractive buy for 2025. Nevertheless, I'm not focusing solely on a yearly stock return. Instead, I'm scrutinizing its long-term potential.
If CrowdStrike maintains a constant growth rate in ARR between now and 2031, this translates to a compound annual growth rate of approximately 16%. This trajectory projects ARR to reach $7.5 billion by 2029, the period when CrowdStrike intends to optimize its financials. If it hits the midpoint of its guidance, this would result in an FCF of approximately $2.7 billion - a considerable leap from its current $1.1 billion figure.
Investing in CrowdStrike now is a gamble on the long-term growth of the cybersecurity industry and its success within it. However, CrowdStrike has consistently remained at the forefront, making it an attractive option for 2025. But it becomes an even more compelling choice if you possess a long-term outlook.
Despite the high valuation of CrowdStrike's stock, with a price-to-free cash flow ratio of 88 and a price-to-sales ratio of 26, investing in the company for the long term could yield significant returns. If CrowdStrike can maintain its projected compound annual growth rate of approximately 16% in annual recurring revenue (ARR) until 2031, this could result in a substantial increase in FCF, making it an attractive investment option for those with a long-term perspective.
In terms of finance and investing, CrowdStrike's diverse offerings and successful growth strategy have positioned it as a lucrative investment opportunity, especially in the cybersecurity sector.
