Home Jersey sale Why Cybersecurity Is Our Main Investing Theme, Crowdstrike vs Sentinel One Results, Cyclical Investing and Macro Data Points

Why Cybersecurity Is Our Main Investing Theme, Crowdstrike vs Sentinel One Results, Cyclical Investing and Macro Data Points

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Jits Weekly Insights week focuses on opportunities in cybersecurity, Crowdstrike vs. Sentinel One earnings, the “hurricane” of macroeconomic data and cyclical investing.

CONTENTS

Stocks and areas of intervention

  • Why cybersecurity is a major theme of our strategies
  • Not All Cyber ​​Stocks Are Positioned Equally: Crowdstrike (CRWD) vs. Sentinel One (S)

Macro data points

  • Investing in cyclical stocks: beginning of cycle or end of cycle
  • Housing data continues to disappoint
  • U.S. auto sales down in May

STOCKS AND FIELDS OF INTERVENTION

Is it time to invest in cybersecurity?

Cybersecurity stocks have declined (some significantly) this year. The fundamentals have, at least, improved. Although the macroeconomic environment remains difficult, IT spending could hold up relatively better. Within IT spending, we expect cybersecurity to be the most defensible area as increasing threats and geopolitical concerns add to an already strong secular backdrop driven by evolving data architectures. Consequently, several sectors of the cybersecurity market are expected to grow in ~15%+ CAGR with innovative companies capturing market share and growing significantly above this level. For more information see our Introduction to cybersecurity.

Specifically, the two major cybersecurity trends that we have identified as priority areas are:

Trend #1 Cloud adoption drives the need for “zero trust” solutions: As organizations embrace digital transformation, legacy firewall vendors lose relevance, creating opportunities for zero-trust architectures

Trend #2 Endpoint Security needs “next generation solutions”: old solutions are inadequate and can only detect about 50% of threats. “Next Generation” Predictive Solutions Based on Artificial Intelligence (AI) and Machine Learning (ML) are Gaining Market Share and Expected to Grow at a CAGR of Over 20% Over the Next 5 Years

Last week, we had several notable cybersecurity revenue reports: Crowdstrike, Okta, and Sentinel One. Overall, the companies saw strong growth, >20%+ revenue, with “next generation solutions growing > 40% + rate and exceeding expectations by >5%.

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Crowdstrike vs. Sentinel One

Crowdstrike and Sentinel One both offer “next generation” solutions for endpoint security. While both earnings reports were strong at first glance, it’s important for investors to dig deeper into the financial data:

  • Crowd grows on a large scale (61% revenue growth despite relatively broad revenue base – F22 $1.5 billion and F23E $2.2 billion) aided by a complete offer. The company has a solid >30%+ FCF Margin and we expect it to generate over $1 billion in FCF in FY23, which provides valuation support for the stock. Typically, high-growth companies trade on multiples of revenue as opposed to FCF because they don’t generate cash flow, but Crowdstrike stands out on both metrics.
  • sentry one is a relatively new entrant in the rapidly growing endpoint security space (>100% revenue growth rate) albeit on a lower revenue base – F22 $200 million and F23E $400mm. The company recorded an operating margin of -73% and -55 million FCF.

Two years ago, we would have viewed both reports with equal favour. However, the era of “free money” is now over and therefore a high premium is awarded to companies that can demonstrate profitable growth at scale. Crowdstrike’s valuation will likely continue to be favorable on an FCF basis in the next 1-3 years. Conversely, for Sentinel One, investors will look at the rate of cash burn (~$100-200m) versus the current cash balance ($1.2b minus $375m for Attivio). Although there is still a cushion for several years of negative FCF, investors today are wary of

MACRO DATAPOINTS

Last week, several executives highlighted the macro of the week with headlines ranging from “hurricanes” planned by JP Morgan CEO Jamie Dimon for “great concern”, felt by Tesla CEO Elon Musk. Although we expect a significant decline in the economy, we note that corporate management teams are generally not the most forward-looking indicators.

Weak economic data has emerged since spot trucking rates weakened in March of this year. This was followed by weak consumer discretionary spending (especially large items such as computers, appliances, etc.) in April, weak retail revenues, excess inventory, weakening contract truck prices, followed by new home sales and lower used truck prices in May (refer to our previous Weekly Insights series for details).

The vast majority of these data points have been widely publicized and follow a typical economic tightening cycle. Discretionary consumer spending is the first to be hit, followed by interest rate sensitive end markets – housing and autos. Finally, the longer cycle commercial construction, aerospace, metals and mining sectors would be considered late in the cycle and would start to see headwinds depending on the severity of the downturn, as it takes time to work on projects and equipment backlog.

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Current environment versus a typical slowdown?

  • Typically downturns are caused by a shock – in this case it is commodity inflation and rising interest rates
  • Rising interest rates create headwinds for expenses that are typically financed (e.g., housing, automobiles) – therefore these areas are the first to experience weakness and are considered “early stage”. cycle”
  • Compared to 2008/09, the consumer has no excess leverage, which limits the decline. However, the common perception that the consumer comes from a position of strength (high personal savings) lasted only a very short time and we are now down to 2008/09 personal savings levels.
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From an investment perspective, we stay away from early cycle exposure (housing, autos and discretionary consumer spending). The industrial economy already went through a recession in 2015/16 and never fully recovered. As a result, we expect the general industrials, aerospace, metals and mining sectors to fare relatively better. We expect the pressure to focus primarily on the consumer.

Housing and auto data points

As expected, housing and autos are already slowing. In addition to weak new home sales, mortgage applications and existing home sales (see our recent weeks Weekly Insights) housing stock began to rise. Inventory hit a seasonal low in early March 2022 and is now up 56% since then (up 14% YoY).

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In the United States, auto industry sales fell 6% in May, with General Motors and Ford reporting lower US vehicle sales for the month (~6%) due to weak demand for sedans and two fewer sales days. While many still blame supply chain issues, we believe there is potential for a U.S. auto cycle reversal, and we are watching trends closely.

For more research, visit our website spear-invest.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.