This week, CrowdStrike (NASDAQ:CRWD) announced its intention to raise $750 million via senior unsecured notes due 2029. Management indicated the company will use the proceeds “for general corporate purposes, which may include, among other things, acquisitions, capital expenditures, and working capital.” It appears as though the cybersecurity specialist is gearing up to make some acquisitions.
Cloud-based cybersecurity platform
CrowdStrike has built a cybersecurity platform that leverages cloud computing to protect endpoints (personal computers, servers, laptops, and mobile devices). The coronavirus pandemic boosted the company’s business over the last several quarters, as many enterprises have been looking to secure the working environments of remote employees. But more importantly, CrowdStrike is set to profit from its innovative offerings that other players, such as McAfee and Broadcom‘s Symantec, can’t match because of their legacy technologies.
In addition, the company developed extra modules that leverage its platform to expand its addressable market and create cross-selling opportunities. For instance, CrowdStrike’s client installed on endpoints can also detect vulnerable software if customers enable — and pay for — that module.
As a result of the company’s strong execution in a favorable environment, revenue grew 86% year over year to $232.5 million during the last quarter. And management expects revenue to grow by 78% during fiscal 2021, ending on Jan. 31.
Looking forward, CrowdStrike will be expanding its business beyond its core endpoint products. It developed a solution to protect cloud-hosted applications (workloads). And it acquired Preempt Security in September to integrate advanced identity protection capabilities that leverage artificial intelligence.
Why more cash?
With such strong results, CrowdStrike scaled its business and improved its profitability over the last few years. During the last quarter, it generated $76.1 million of free cash flow, up from $7.0 million in the prior-year period.
Thus, the company managed to accumulate $1.1 billion of cash and cash equivalents and no debt at the end of the last quarter. In addition, at the beginning of the year, it updated its credit facility due 2026 to have up to $750 million of extra cash available at any time.
Given the company’s huge and growing cloud cybersecurity market, which management estimated at $38.7 billion by 2023 (up from $32.4 billion in 2021), CFO Burt Podbere indicated during a conference call in December that the company will “invest aggressively” to capture those opportunities.
But given its positive free cash flow and rock-solid balance sheet, CrowdStrike doesn’t need fresh cash to fund its operations and investments. So why is it looking to add $750 million to its large cash balance? Most likely, it’s gearing up its cash position to gain flexibility and take advantage of its growth opportunities by acquiring businesses.
Indeed, CrowdStrike can enhance its platform, increase its addressable market, and generate additional cross-selling opportunities by integrating new technologies. The recent acquisition of Preempt Security illustrates that strategy: CrowdStrike will add an extra module to its platform with the start-up’s identity protection capabilities.
That strategy isn’t without risks, though. In the current favorable context for the tech sector, some companies have reached sky-high valuations and CrowdStrike may overpay to acquire technologies or businesses. Execution risks also exist, as challenges in leveraging the company’s platform by integrating new technologies could materialize.
As an illustration of the high valuations of some tech stocks, CrowdStrike stock is trading at a lofty price-to-sales ratio of 65. That suggests the market expects the company’s recent phenomenal results to continue over the next several years thanks to flawless execution.
Yet investors looking for exposure to the cloud cybersecurity area should keep the company on their watchlists, as it’s building a large cash position that allows it to enhance and leverage its innovative cloud platform with acquisitions.
Herve Blandin has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
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