As of this writing, shares of cybersecurity company CrowdStrike (CRWD 4.48%) are trading at nearly $400, which is an all-time high. It's been a sensational ride for shareholders over the last five years, with the stock gaining nearly 500%. But I know this doesn't matter to anyone right now. Everyone just wants to know what will happen over the next five years.
Of course, there's no way to say with certainty what will happen over the next half decade. What we're all looking for are reasonable assumptions. And I believe that investors can conclude multiple things about CrowdStrike that are reasonable, indeed.
NASDAQ: CRWD
Key Data Points
The most reasonable assumption of all is that the cybersecurity sector will continue to grow. According to Statista, the cost of global cybercrime is expected to be $9 trillion this year, increasing to surpass $15 trillion in 2029. Therefore, while it might be pricey for businesses to pay for cybersecurity, it's increasingly more expensive to not pay for protection.
There will undoubtedly be a growing opportunity for CrowdStrike to capitalize on over the next five years. For its part, CrowdStrike's management believes the market opportunity for its AI-native security platform will increase by 125% by 2028, reaching $225 billion.
Will CrowdStrike be a company that capitalizes on the fast-growing space, or will it lose out to its rivals? After all, there's loads of competition. But there are reasons to believe CrowdStrike can hold its own.
Consider that CrowdStrike is routinely recognized by independent parties as a leader in the cybersecurity space, including by Gartner and its Magic Quadrant analysis. It's reasonable to expect a lot of companies to want to buy protection from a leader.
To reiterate, the opportunity is growing, and CrowdStrike will likely grow because of its leadership position. It will also likely grow because it has a lot to offer its customers, including a cloud-based software platform. And within the platform, customers can choose from 28 different software modules, as of its fiscal first quarter of 2025, which ended in April.
CrowdStrike's customers tend to start off small and progressively adopt more software modules. In Q1, companies using eight or more modules from CrowdStrike were up 95% year over year. This allows the company to make more money from existing customers.
And there's a secondary benefit. Because this is a cloud-based software platform, there's little incremental cost to provide additional modules to customers. Therefore, CrowdStrike's free cash flow is skyrocketing as its revenue grows.
CRWD Revenue (TTM) data by YCharts
If its customers keep adopting more modules, expect CrowdStrike's revenue and free cash flow to continue jumping higher over the next five years. And there's good reason to believe they will. Only 28% of its customers had at least seven modules as of Q1. In other words, nearly three-quarters of its customers have another 20 modules to choose from in coming years.
It's hard to predict just how high its revenue will be in five years or what kind of free-cash-flow margin it will have. But generally speaking, the next five years should be stellar for CrowdStrike's business.
The one wild card that's hard to predict
If this all sounds amazing, that's because it is. But most investors believe the opportunity for CrowdStrike is exceptional. And unfortunately, that's creating a problem for investors today: there's a lot of demand for CrowdStrike stock, which is pushing the valuation to very expensive levels.
For example, CrowdStrike trades at nearly 100 times its free cash flow. By comparison, tech giants Microsoft, Apple, and Palo Alto Networks trade at much cheaper multiples. And value investors would likely complain that the valuations for this trio are still too high.
CRWD Price to Free Cash Flow data by YCharts
Stock valuations can play a big role in an investment. For example:
- If CrowdStrike doubles its free cash flow over the next five years and its valuation also doubles during this time, then the stock price will quadruple.
- If CrowdStrike doubles its free cash flow and its valuation stays the same, then the stock price will also double.
- If CrowdStrike doubles its free cash flow but its valuation falls by 50%, then the stock price will stay exactly the same.
Considering CrowdStrike's valuation is already pretty high, I don't expect it to increase over the next five years. To the contrary; it seems more likely to come back down to earth, even if just modestly. Therefore, this stock does have valuation risk. And this risk may be higher than it is for other investment options.
That said, I would still expect CrowdStrike stock to be at a higher price in five years compared to where it is today. The company's growth opportunity is just too big to bet against it.
