Crowdstrike and Sentinel One both offer “next gen” solutions for end-point security. While both earnings reports were strong at first sight, worth diving deeper into the financials:
- Crowdstrike is growing at scale (61% revenue growth despite relatively large revenue base — F22 $1.5bn and F23E $2.2bn) aided by comprehensive offering. The company has a solid >30%+ FCF margin and we expect it to generate $1bn+ in FCF in FY23 which provides a valuation support for the stock. Generally high growth companies trade on revenue multiples as opposed to FCF, as they do not generate cash flow, but Crowdstrike stands out on both metrics.
- Sentinel One is a relatively newer entrant in the endpoint security space growing rapidly (>100% revenue growth rate) albeit on a lower revenue basis — F22 $200mm and F23E $400mm. The company reported a -73% operating margin and -$55mm FCF.
Two years ago I would have viewed both reports equally favorably. However, the era of “free money” has now ended, and consequently there is a strong premium assigned to companies that can demonstrate profitable growth at scale.
Crowdstrike’s valuation will likely continue to look favorable on a FCF basis 1–3 years out. Conversely, for Sentinel One, investors will be looking at the run rate of cash burn (~$100-$200mm) vs. the current cash balance ($1.2bn minus $375mm for Attivio). While there is still cushion for multiple years of negative FCF, investors today are warry of <5 year runways and potential to have to raise equity.
Cybersecurity Primer for background info: https://spear-invest.com/cybersecurity-primer1/
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