It’s easy to overlook the importance of management when weighing a potential investment. But when passion drives someone to start a business, that energy and enthusiasm tends to pervade the corporate culture. More to the point, those stocks tend to outperform the market.
Research from Fidelity Investments indicates that founder-led stocks generated a 10.5% annualized return between May 2007 and January 2019, topping the 8% return of the broader Russell 3000 Index.
In 2009, three friends — Matthew Prince, Michelle Zatlyn, and Lee Holloway — founded Cloudflare with a mission to build a better internet. They first envisioned their business as a cloud-based firewall, but the company’s ambitions have since expanded dramatically.
Today, Cloudflare’s network spans 100 countries, interconnecting with over 9,500 other networks around the world. This architecture lends itself to security, speed, and reliability, allowing Cloudflare to provision its clients with a range of services that boost the safety and performance of their applications, websites, and corporate networks.
For instance, Cloudflare Workers is a serverless platform that allows developers to write code directly on the Cloudflare network. In this scenario, clients can build low-latency, scalable applications without managing the underlying infrastructure. That creates a good experience for end-users while reducing cost and complexity for Cloudflare’s clients.
More importantly, Cloudflare’s solution offers greater cost efficiency than public clouds like Amazon Web Services, Alphabet‘s Google Cloud, and Microsoft Azure. Not surprisingly, that value proposition has translated into strong growth.
Q1 2021 (TTM)
For subscription software companies, dollar-based net retention rate (DBNRR) is one of the best ways to gauge customer satisfaction. In Q1 2021, Cloudflare’s DBNRR was 123%, meaning the average customer spent 23% more compared to the prior year. In other words, clients find Cloudflare so useful that they tend to purchase more products over time.
Looking ahead, the company should benefit as more enterprises look to drive performance, security, and efficiency through digital transformation. In fact, management puts the company’s market opportunity at $100 billion by 2024. And with Prince still at the helm as CEO, and Zatlyn working as chief operating officer, I wouldn’t be surprised if this stock doubled or tripled in the next five years.
George Kurtz founded CrowdStrike in 2011, creating the first cloud-native AI-powered cybersecurity platform. Since then, the company has established itself as an industry leader and its software now comprises 19 different modules, ranging from endpoint and cloud security to identity protection and threat intelligence.
Notably, each module is delivered through a single lightweight sensor that uses less than 2% of the host’s processing power. This gives CrowdStrike an edge over rivals like SentinelOne, which deploy bulky software that burdens devices with high memory consumption and disk utilization. So, what’s the secret?
CrowdStrike’s lightweight sensor offloads complex tasks, harnessing the computational power of the cloud. Each week, its predictive engine analyzes over 6 trillion data points, continuously searching for malicious activity. And when a threat is identified in one environment, it is automatically blocked for all other clients.
This creates a powerful network effect: More clients means more data, and more data means better AI, which extends CrowdStrike’s ability to prevent attacks. Put another way, each new client makes CrowdStrike’s predictive engine a little smarter, and that dynamic has been a powerful growth driver.
Q1 2022 (TTM)
Last year, CrowdStrike’s subscription revenue run rate crossed $1 billion, making it the third-fastest software-as-a-service (SaaS) company to reach that mark. Only Zoom Video Communications and Salesforce have hit that milestone faster. Note too that CrowdStrike’s DBNRR exceeded 120% in Q1 2022, indicating strong customer retention.
But what does the future look like? In recent years, cybercriminals have become increasingly sophisticated, and sites offering ransomware as a service have made it possible for almost anyone to launch a crippling attack. The rise of remote work and cloud computing have also complicated corporate security, leaving many enterprises vulnerable to hackers. Going forward, these trends should be a powerful growth driver for CrowdStrike. And with Kurtz at the helm as CEO, I believe this stock could double or triple in price in the next five years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.