Earnings season has started ramping up, and several tech growth stocks in the US have begun surging once more. My portfolio has certainly benefited from this recent long-awaited momentum. And it may be an indicator that a recovery and subsequent new bull market is underway. If that’s the case, the clock might be ticking for investors to capitalise on the buying opportunities created by last year’s correction.
With that in mind, here’s one tech company I’m currently considering to add to my portfolio this month.
A new leader in cybersecurity?
With cyber-attacks becoming increasingly sophisticated and data often described as the most valuable commodity in the world, spending on cybersecurity has surged in recent years. And I don’t think that trend is about to change any time soon.
There are a lot of players in this space. However, CrowdStrike Holdings (NASDAQ:CRWD) looks to be the most promising, in my eyes. The firm’s cloud-based Falcon platform provides a complete ecosystem of cyber defence solutions. Falcon monitors and analyses the flow of data moving through a customer’s network using machine learning algorithms.
Apart from detecting and defending against known threats, the data is also used to train its AI-powered systems to detect and combat new threats that haven’t been encountered before. This ultimately creates a powerful competitive advantage called ‘a network effect’.
As more customers use Falcon, more data flows through the platform, training the AI models to improve, resulting in better defences. This, in turn, attracts more customers in a value-building loop. And with over 23,000 businesses now relying on CrowdStrike versus 2,500 in 2019, I think it’s fair to say the platform is proving popular.
Risk versus reward
The revenue growth over the last five years has averaged a staggering 55% annualised rate. A good chunk of this stems from the acquisition of thousands of new customers. However, CrowdStrike also seems to have a knack for getting existing clients to spend more each year.
Even in 2023, when many businesses are seeking to cut costs, the net dollar retention rate for this business still sits above 120%. Meanwhile, the subscription nature of the Falcon platform results in impressive recurring revenue and free cash flow generation.
However, there are some blemishes in its impressive financial performance. CrowdStrike has yet to turn a profit, and it’s largely down to the group’s exceptionally generous employee stock-based compensation packages.
With a shortage of expertise within this industry, CrowdStrike is having to cough up quite a bit to attract and retain its technical staff. While stock-based compensation can be a powerful non-cash flow interrupting tool, it also dilutes shareholder positions. And over the last five years, the number of shares outstanding has climbed more than 20% directly because of this.
The bottom line
Providing that CrowdStrike can continue to deliver growth to shareholders, the equity dilution may be a fair price to pay. But there’s no guarantee of that. And as a relatively young enterprise with some heavy-hitting competitors, CrowdStrike undoubtedly carries a lot of risks.
Nevertheless, I remain cautiously optimistic. And once I have more capital at hand, I may decide to open a small starter position within my growth portfolio.