Today I discuss 3 companies with giant tailwinds behind them. Each of these industries have benefitted from a lockdown economy, but importantly these trends were already happening before the pandemic. Coronavirus has just been an accelerant.
Thesis - CrowdStrike is a leader in cybersecurity. They specialise in endpoint security - their software sits across devices such as laptops and phones, constantly analysing data like memory usage, CPU and file signatures for potential threats. Unlike legacy endpoint security providers (Cisco, Palo Alto networks), CrowdStrike is a cloud native offering. From a product perspective, this gives them some interesting advantages. They can analyse data across a network of separate devices, across companies, building a larger picture of potential threats, whereas legacy providers treat each company as standalone entities. CrowdStrike does this using its AI enabled platform, which will get better as the company grows and consumes more data. It also means they can be installed and implemented more quickly at scale, with customers able to select specific modules from their platform based on need (rather than a set one-size fits all product). From a commercial perspective, the cloud-based approach also gives it a Saas revenue model. This company has been involved in a number high profile breaches already, helping to identify the Russian involvement of the Democratic Party cyberattack in 2016. They have benefitted from the increased digitisation in a work-from-home environment, with the market cap up 3x since its March low.
Leadership - CrowdStrike’s founder and CEO is serial entrepreneur George Kurtz. He is a veteran of the cybersecurity industry. Having started his career in the security team at PWC, he eventually started his own security consultancy, Foundstone, which he eventually sold to McAfee for almost $90m. He spent a number of years as a senior exec at McAfee before founding CrowdStrike. Having spent a number of years working for the legacy security providers, he seems well placed to take them on. On Glassdoor.com he has a 96% approval and he has even co-authored a book about cybersecurity.
Financials & Performance - CrowdStrike’s platform has been recognised as a security leader by Gartner in their 2019 Magic Quadrant report and by Forrester Wave. They have annual recurring revenue of $907m and in their third quarter report announced 86% revenue growth. They added 1,186 new subscription customers, for a total of 8,416 customers to date. 61% of their customers are now using 4 or more modules, a number that is also increasing and highlights an expansion model.
Risks - Cybersecurity is becoming a competitive and populated market with legacy providers (Cisco, Palo Alto, McAfee, FireEye) as well as new Security-as-a-service providers (ZScaler, CarbonBlack, etc). It is also possible that core cloud providers like Amazon, Google and Google could in theory move into the space. The company is also very richly valued at the moment, having enjoyed an impressive run over the last 6 months. Gross margins are 73%, having increased incrementally over the last 18 months.
Thesis - Roku is a leading streaming platform. Roku manufactures and sells media players that allow customers to connect their TVs to a range of streaming providers. Customers can easily switch between subscription services like Netflix, Amazon Video, HBO, Disney+ and a number of ad-supported content providers. They offer an advertising platform, so that these services can push their latest shows and brands can reach consumers. Online streaming continues to be a mega trend, which the Coronavirus pandemic has accelerated further. Roku’s strategy is to remain an agnostic platform, supporting all of the individual content providers and benefits from the increased streaming numbers no matter which individual brand or show is performing best. Think of Roku as the operating system for the TV, where content creators, advertisers and customers are the key steak holders. So far they have done a great job at pleasing all three.
Leadership - Roku’s co-founder and CEO is Anthony Wood. Wood has started several companies, one of which was ReplayTV - one of the first digital recorders that allowed customers to record and re-watch shows. From there, he joined Netflix to work on an internal project that put streaming players in people’s homes. Reed Hastings decided that the project could damage their relationships with content providers, so the product was spun out into a separate company, that became Roku.
Financials & Performance - Roku has 46m active accounts, adding 2.9m in the last reported quarter. Revenue grew 73% year over year, an acceleration from the previous quarters growth of an already impressive 50%. The average revenue per user is also increasing over time, now at $27, up from $22.58 a year before. Whilst Roku was profitable in the last quarter, it generally invests in continued expansion.
Risks - Streaming is a hot market and other devices do exist. Roku’s agnostic positioning gives it an advantage over say the Amazon TV stick. Roku could be at risk if the content players stop licensing shows through the platform, but given their popularity with end customers, they seem well positioned.
Thesis - Take-Two is one of the leading video game developers, with popular titles such as Red Dead Redemption, Civilisation and Grand Theft Auto. Gaming as an industry is having its moment; with people spending more time at home and many forms of entertainment closed, the hours spent gaming have rocketed and many people have been introduced to gaming who might otherwise not have. However, gaming as a business has historically been categorised as hits-based or even cyclical, closely linked to the release of consoles and dependent on new titles. More recently this has been changing. Game developers are utilising in-game transactions and downloadable content to commercialise games after initial release. Take-Two in particular has improved its ability to make their games sustained successes, with GTA now in its 24th year! Gaming is also becoming more culturally relevant, with the rise of e-sports and in-game concerts (see Lil Nas X or Travis Scott), you can expect to hear and read about gaming more in day to day media. Take-Two is an owner and producer of the core IP that drives a growing industry.
Financials & Performance - Over their 2020 fiscal year, Take-Two recorded almost $3b in revenues, a company high. $2.38b of that (80%) was delivered digitally, and 51% was from recurring spending (micro-transactions). Both those numbers are on the rise, highlighting the changing nature of the business. Gross margins are typically between 45-55% and the company is both cash-flow positive and profitable.
Risks - Founded in 1993, Take-Two is one of the mature players in the space. They were late to mobile gaming, although have made some smart acquisitions in the space. As with any creator of IP, their success will rely on their ability to continue building and promoting games that people love.