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$CRWD and $S: Fighting it out in a recession-strained Endpoint Security market
TLDR: Although I’ve been bullish on both vendors for a long time, recent news has introduced risk and reframed my thinking on both $CRWD and $S in the near term.
I have been bullish on $CRWD since before they went public, when I had an opportunity to talk with a Product Manager about their architecture. I knew they were going to be disruptive, and the acquisitions of Cylance, Carbon Black, and Symantec really created an environment in which $CRWD could flourish in a saturated endpoint market. With $S, which went public more recently, I really wanted to wait and see how things played out before making any decisions about how effective they were going to be competing with $CRWD.
What I came to realize is that in a vast market with a lot of legacy players, there was plenty of room for $CRWD and $S to do well swimming in their own lanes, and I’ve been bullish on both despite the fact many analysts and investors were talking about how the newly public $S was going to encroach on $CRWD’s business. You can look back on $CRWD’s chart and see where the narrative started to change after $S IPO’d. As these two vendors grow their businesses, it naturally follows that they will compete more heavily as time goes on, and while that was happening to a small degree last year, now we have a catalyst for acceleration. So what is it?
The catalyst that has forced $CRWD and $S’s lanes to converge more rapidly is the fear of a recession. Gone are the days of blank check enterprise security budgets. Customers (those of CRWD and S) are going to be analyzing budgets across the board with much more scrutiny. They’re going to ask the tough questions like, “Why are you so much more expensive than X vendor?” To be honest, I wasn’t convinced recession fears were much of a catalyst for anything other than customers pausing to consider their budgets, which would only create short term demand hiccups and not actual demand destruction as far at the endpoint space was concerned. However, a headline from the week before last announcing $CRWD had poached $S’s CMO and CPO (of 5 years) changed my thinking. Why?
It's important to understand that $CRWD is a market leader in its segment, and is widely considered the best of the best when it comes to endpoint security. By who? The cybersecurity channel that resells and implements security solutions for a variety of vendors, by customers, and by investors. It’s not easy to build an excellent reputation in the channel as a new vendor, and yet, $CRWD has managed to do it in only a few years. They did it by developing a solid product, great marketing, and a winning channel program. None of those things have changed. It begs the question- why does a company with excellence in all three areas need to steal executive level talent from what is considered by many to be its biggest competitor? I think the answer is obvious. They have more money than $S, and they did it to handicap their competition. I can’t judge them too harshly for that, but unfortunately, I, along with other investors, are going to see this as an act of desperation. In many ways it validates that narrative that was wrong for so long about how $S was encroaching on their business. Now we know for sure that it is.
Unfortunately for $S, this is in no way a positive for them either. Going into a recession, and to the extent it actually materializes, I had been of the opinion $S had an advantage over $CRWD in that the base cost of their solution had been running about ~25% cheaper than $CRWD. Some might say it doesn’t have all the bells and whistles of $CRWD’s solution, but who is buying bells and whistles in a recession anyway? Further, many channel partners are of the opinion the solutions are at enough parity to be competitive, and clearly they are or $CRWD would not be stealing talent. So what is $CRWD doing with those two new hires they stole from $S?
The ex-CMO of $S will now be in charge of Channel at $CRWD, and will help them move down market. The ex-CPO of $S will continue as CPO at $CRWD and will oversee data, identity, cloud, and endpoint. This is a good time to mention that for most cybersecurity vendors, the Channel is absolutely critical to their sales and growth initiatives. I don’t need to explain why this is bad for $S, there has never been a time where losing 2 key executives to a competitor has been a net positive for a company. The more interesting thing is how this could impact $CRWD negatively, other than the “validating the competition narrative” I outlined earlier. Imagine you work at $CRWD for years to develop an amazing channel program and build a highly competitive product. You’re crushing it. You’re warding off ankle biters left and right, and then suddenly the CEO you work for hires the guy you’ve been competing against for all these years and makes him your boss, rather than promoting you, or at least putting him under you. I can’t say I would be pleased about that personally, or that I would be very motivated to continue working at $CRWD. It feels a bit like they’re cutting off their nose to spite their face. In turn, $S announced several new executive hires this morning, including $CRWD’s Global VP of Product Marketing.
Anyway, it’s going to be a very interesting earnings cycle, and while there’s no way to know for certain, I’m not expecting either vendor to blow it out of the water, especially when it comes to guidance. I believe $S will experience some short term difficulties as a result of the news, but nothing they can’t recover from. We will see if $CRWD is able to successfully move down market- their growth rate (and stock price) depends on it.
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