The COVID-19 pandemic has accelerated the shift to digital, with organizations around the globe forced to move online. This has led to the number of cybersecurity attacks soaring and organizations seeking to protect themselves against them. After producing market-beating returns since their respective IPOs in 2019, we ask if Cloudflare (NASDAQ: NET) or Crowdstrike (NASDAQ: CRWD) is a better buy?
Cloudflare is a technology company founded in 2010 that provides a suite of products focused on security and web infrastructure solutions. The company is on a mission to "better the internet" and is led by founder and CEO Matthew Prince, who owns roughly 13%.
Cloudflare has consistently grown revenue, and Q2 2021 was no exception, with revenue growth accelerating to 53% in Q2 2021, reaching $152.4 million. It also has high gross margins, which were 78% in the quarter. There is still a colossal and expanding market opportunity estimated to reach $86 billion by 2022.
The company continues to expand its customer base and in Q2 added a record 140 large customers and ended the quarter with over 126,000 customers. It continued to monetize its customers and reported a 124% dollar-based net retention rate in the quarter. This demonstrates both the stickiness and ability to upsell through its land and expand model.
However, like many other growth stocks, Cloudflare is unprofitable, reporting a net loss increasing to $35.5 million in the quarter. It is also trading at a frothy valuation of roughly 104X price to sales (P/S), requiring flawless execution going forward.
Crowdstrike is a cybersecurity company that provides endpoint security, threat intelligence, and attack response services. Since its founding in 2011, two of the three founders have remained involved, including CEO George Kurtz, who has high insider ownership.
Unlike traditional cybersecurity solutions, Crowdstrike is cloud-native and does not require on-premise solutions, giving it a competitive advantage over its rivals. Crowdstrike has also been recognized as a leader in Gartner's Magic Quadrant for 2021 for endpoint protection.
Crowdstrike reached $1.34 billion in annual recurring revenue in fiscal Q2 2022. The majority of its revenue is subscription-based, which is highly predictable and sticky, and in Q2 2022, total revenue was $337.7 million, a 70% increase year-over-year.
Being a leader in the space has helped it attract a wide range of customers such as Goldman Sachs, Sony, and more as Crowdstrike is viewed as the "gold standard of security", according to Kurtz. The number of customers using its platform totaled 13,080, and once again, its dollar-based net expansion rate exceeded 120%, with customers signing up to multiple modules.
Crowdstrike is also operating at a loss which expanded to $47.4 million, compared to $30 million a year prior. The company also faces competition from other players in the space, such as PaloAlto Networks, which are trading at lower valuations.
Although both could be a good addition, Crowdstrike is a leader in the space and is trading at a lower valuation which swings the vote it's way.
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