Crowd Strike Valuation Shines Light on Undervalued Cybersecurity Companies

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Cybersecurity company CrowdStrike (CRWD), which provides endpoint protection to stop data breaches,has already had quite the remarkable love affair with capital markets since IPOing in the USA in early June. It’s IPO was priced at 34 US-Dollar, up from an original range of 19-23 US-Dollar, and the shares quickly soared to above 60 US-Dollars on the first day of trading, giving IPO investors immediate 75% gains.At the current share price of 75 US-Dollar, the market cap is approx. 12 billion US-Dollar.

Hyper growth – but not profitable

And one can see why the company is so appealing. Not least because it is growing the top line by more than 100%. With Capital G (Google), Accel and Warburg Pincus, CrowdStrike has some very reputable investors. It uses all the right buzzwords… AI, Crowdsource, Cloud, etc. Gross margins are high at more than 70%. And most importantly,it is in a hot space – cyber security. We all want more digital security.

CrowdStrike’s customers include the likes of Amazon Web Services, Tribune Media and Credit Suisse.CrowdStrike estimated that it made roughly $95 million in revenue for its first quarter of 2019 — double the same period a year earlier, according to its IPO paperwork. Street estimates also suggest about $26 million in losses, less than the $33 million it reported a year prior. Going forward, CrowdStrike wants to focus on expanding its geographic reach further, including acquisitions.

But investors shouldn’t forget,CrowdStrike has never made any money on an operating basis and the current valuation puts them at approx. 60 times 2018 revenues. If we assume that they grow revenue at 125% they are still at a 25x revenue multiple.

European peers more favorable valued

CrowdStrike’s success is drawing attention to some lesser known international peers especially as they provide much more favorable valuations and hence much more potential upside. It’s unlikely that CrowdStrike’s share price will double once more in the near future from current valuation levels, but according to European investment banking powerhouse Berenberg the shares of German cybersecurity companyCyan, for example,can double easily.

Cyan: Profitable growth

Like CrowdStrike, Cyan’s mission is to make digital products’ and their data far safer. As more IoT devices connect to the internet and traffic continues to increase, there is ever more information to protect. Similar to CrowdStrike, Cyan has high growth as well. Based on their guidance of revenue growth reaching EUR 35 million and EBITDA of EUR 20 million in 2019, this is forecast growth of 86% growth at the top line this year and incremental margins are even higher thanCrowdStrike’s70%.

The valuation on Cyan is not exactly up in the cloud, however. As a multiple of 2019 Bloomberg consensus forecasted revenue, Cyan trades at 7x revenues. So approx. ¼ of CrowdStrike valuation. Perhaps the most positive differentiation is that Cyan is not only growing like weeds,but it is profitable at the same time. They are expected to have a 17.7x P/E multiple this year falling to just 12.2x next year.

While the focus of CrowdStrike is clearly on the enterprise segment, which is a highly competitive market with big players who are well established, Cyan focuses on the end customer through mainly mobile network operators. Hence, Cyan doesn’t need the same size salesforce because there are fewer large customers they need to snare who will then sell their product on their behalf.

Potential acquisition target

Cyan revenues are based on active subscribers on- and off-net and creating a huge new, very profitable revenue stream for network operators (who compare Cyan’sproduct’s profitability to them to that of SMS back in the day)  – thus giving operators a profit advantage against their competition with best possible scalability. Cyan’s flagship client is Orange, with its 262 million global customers. If they do 25% only out of Orange after some years, revenues should be several 100 million Euros only with this one partner.

And who know, potentially companies like Cyan are even perfect acquisition targets for better capitalized US peers. Cyan market cap is 4% of CrowdStrike, and hence an easy to swallow move…

 

 

 

 

 

 

 

 

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