On today's segment of Good Buy or Goodbye, Yahoo Finance's Julie Hyman is joined by Henion & Walsh Chief Investment Officer Kevin Mahn to dissect his stock picks within the cybersecurity sector.
Mahn identified CrowdStrike (CRWD) as a stock to buy. He cites several key reasons for this recommendation, acknowledging that "AI can be used for good and AI can be used for bad," particularly in the realm of cybercrime. However, Mahn notes that CrowdStrike is leveraging AI "to help thwart AI-powered cyberattacks." Furthermore, the company's revenue and earnings growth have surpassed expectations, with CrowdStrike hitting the $3 billion revenue mark, and Mahn doesn't "see them stopping."
On the other hand, Mahn identifies BlackBerry (BB) as a stock to avoid. He suggests steering clear of this investment due to the company's struggles in successfully transitioning its smartphone business into the cybersecurity realm, stating "this is a tough market to break into." Secondly, Mahn points to BlackBerry's lackluster earnings growth and negative free cash flow as further reasons to avoid purchasing.
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Editor's note: This article was written by Angel Smith
Video Transcript
JULIE HYMAN: It's a big noisy universe of stocks out there. Welcome to Good Buy or Goodbye. Our goal to help cut through that noise to navigate the best moves for your portfolio.
And today, we're taking a look at the surge in cybercrime. Attacks expected to cost companies more than $10 trillion each year by 2025. That's according to research firm Cybersecurity Ventures. So what's the right way for investors to play it right now?
I'm here with Kevin Mahn, Chief Investment Officer at Henion and Walsh. Great to see you, Kevin.
KEVIN MAHN: Great to see you, Julie.
JULIE HYMAN: Thanks for coming in.
KEVIN MAHN: Thanks for having me.
JULIE HYMAN: Of course. So let's get to your stock. And that is CrowdStrike. So this is a stock that's already been doing pretty well this year.
We have seen a benefit reported earnings and rose on the back of that. So let's get to your buy case here. You think it is leveraging AI in cybersecurity.
KEVIN MAHN: Absolutely. And what's been lost in all this AI euphoria is the critical importance of cybersecurity, the glue that holds the whole technology puzzle together. But AI can be used for good, and AI can be used for bad.
One of the bad areas is clearly cyber crimes. And Crowdstrike is one of the few companies that's actually leveraging AI through machine learning to help thwart AI-powered cyber attacks. And you made the stats before.
Excellent points. 10 and 1/2 trillion dollars. Cybercrime cost are estimated to increase to annually by the end of 2025, and it's further predicted that roughly 45% of all companies will experience some form of a cyber attack by the end of 2025. CrowdStrike can help prevent those attacks.
JULIE HYMAN: Interesting. OK. And I mentioned what we've seen in terms of some of the catalysts from their earnings reports. And as you point out, they've been above expectations.
KEVIN MAHN: Knocking the cover off the ball clearly so far. Their last quarter reported above expectations in terms of revenues and earnings. They actually hit $3 billion for the first time in terms of annualized revenue. And I don't see them stopping from here.
JULIE HYMAN: And the stock has done well. We've not only seen the shares gone up, but we've seen free cash flow also improve.
KEVIN MAHN: Free cash flow is incredibly important to a portfolio manager like myself. What does it mean? They manage their balance sheet well. They have cash flow to actually engage in other potential acquisitions.
They can actually Institute a dividend. I'm not saying that they will, but they could. And they could also hire quality talented people that can help them further invest in AI.
JULIE HYMAN: Of course, we always like to talk about what the potential risks are. And in this case, the stock performance is part of the risk perhaps. The three-year performance that we pointed out, it's very strong 3 year performance. But from a risk perspective, does that then stretch the valuation?
KEVIN MAHN: It has. And hopefully, earnings will start to catch up to that elevated price level that we've seen with that record growth we've seen in the stock price over the last three years. But they have a forward PE of 81 right now. That's a little bit rich for me to feel comfortable adding significantly to the position. But I do believe CrowdStrike is certainly a good buy over the next three to five years.
JULIE HYMAN: And is this one you hold?
It's one that
KEVIN MAHN: We hold within various portfolios at smart trust.
JULIE HYMAN: All right, let's talk about the one that you would not be interested in. Coincidentally, BlackBerry it's actually reporting after the close of trading today. So it's a good time to be talking about it.
The stock has not done well year-to-date here. And as you say, it's had difficulty pivoting businesses. It's actually talked about separating its cyber business from its internet of things business.
KEVIN MAHN: Yes and we have to remember. BlackBerry, Yes this is the BlackBerry that was once one of the world's largest smartphone manufacturers they've pivoted now to cybersecurity.
And they're offering these enterprise wide cybersecurity solutions to markets, such as automotive, medical, and industrial. But they've had a lot of difficulty in doing so. Right now, Julie, there's 3,500 companies engaged in the cybersecurity industry. This is a tough market to break into. And if you don't have the mass, and the scale, and the AI-oriented solutions like CrowdStrike does, it's going to be a difficult road ahead for BlackBerry.
JULIE HYMAN: And in contrast with CrowdStrike when these guys have been coming out with numbers, we have not seen positive surprises. Do you think that's going to be the case again when we hear from them?
KEVIN MAHN: Five of the last quarter's, they've reported negative earnings per share growth. Unfortunately, it seems like this is going to be the sixth of the last eight quarters now as analysts are forecasting a loss of $0.03 per share. They're not profitable.
Revenues continue to come below expectations. Perhaps they'll surprise us after the close today. And you'll see a bump up in the stock price. But it doesn't look that way right now.
JULIE HYMAN: And then finally, again, drawing that contrast with CrowdStrike, negative free cash flow here. And the stock performance has been negative. We looked at that year to date performance. And then here's that three-year performance.
KEVIN MAHN: Not a great chart. And certainly, as a portfolio manager, that's something that makes me want to turn my head and say goodbye. I just see this as a very difficult field for BlackBerry to really start to gain market share in.
They have negative free cash flow. They can't engage in acquisitions. They can't invest in AI in a significant way. So if there are only two cybersecurity names, and we know there's 3,500, I would certainly choose CrowdStrike over BlackBerry.
JULIE HYMAN: And let's talk about what could go right for blackberry. Maybe they could come out and beat on the numbers.
KEVIN MAHN: Maybe they beat on revenues. Maybe they actually turn a profit this quarter. Again, analysts don't believe so. But perhaps they could. And if they do, if they have staying power in this area, and they can provide some type of innovative enterprise, wide cybersecurity solution, and move beyond automotive, maybe there's hope for BlackBerry.
JULIE HYMAN: And if they do succeed in splitting up the two parts of the business, does that unlock any value potentially?
KEVIN MAHN: Possibly. By splitting it up someone, becomes interested in acquiring, one of those solutions. So they could use the cash to invest in the other area.
JULIE HYMAN: Gotcha. All right. Thanks so much, Kevin. All right. Let's sum up what you're telling investors here. Buy CrowdStrike, based on its use of AI and cybersecurity solutions, revenue and earnings growth and positive long-term performance.
On the other side, you say avoid BlackBerry for the challenges involved with pivoting from a smartphone maker to a cybersecurity provider. Its lack of earnings growth. And that weak three year performance as we saw on the chart. Thanks, again. Appreciate it.
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