CrowdStrike Stock Is Getting Added to the S&P 500. But This Other New S&P 500 Addition Could Be a Better Bargain Buy. | The Motley Fool (2024)

Although CrowdStrike is a great business, this other company has less valuation risk right now.

The S&P 500 index is a well-known benchmark composed of roughly 500 stocks that are U.S. companies, big, and profitable. Cloud-based cybersecurity company CrowdStrike (CRWD -0.71%) will be included starting on June 24. And this company has absolutely earned the honor of inclusion.

CrowdStrike went public in 2019. And during the company's fiscal 2019 (which ended in January of that year), it generated revenue of just $250 million. Fast forward to fiscal 2024 (which ended in January of this year), and it generated revenue of over $3 billion. In short, CrowdStrike has grown by an extraordinary amount in just five years as a public company.

The quality of CrowdStrike's growth is also noteworthy. There are companies that have grown by a comparable amount, but few have also simultaneously unlocked massive profitability. Free cash flow has skyrocketed. And in its fiscal first quarter of 2025, CrowdStrike achieved a huge free-cash-flow margin of 35% -- that's incredible.

However, one could nitpick CrowdStrike as an investment due to its lofty valuation. Overpaying for an investment -- even for shares of a great business -- can negatively impact future returns. And trading at a price-to-sales (P/S) ratio of nearly 30 and a price-to-free-cash-flow ratio of nearly 100, CrowdStrike stock is expensive today.

CrowdStrike Stock Is Getting Added to the S&P 500. But This Other New S&P 500 Addition Could Be a Better Bargain Buy. | The Motley Fool (1)

CRWD PS Ratio data by YCharts

To be fair, it may still work out for investors. The cybersecurity space is an enormous opportunity and CrowdStrike is one of the best players. Therefore, its long-term growth and profits may justify its valuation.

However, for investors concerned about this valuation risk today, website company GoDaddy (GDDY 0.55%) is getting included in the S&P 500 alongside CrowdStrike. And it's a much better bargain buy today, as I'll explain.

Why investors should look at GoDaddy stock

Over the last three years, shares of GoDaddy are quietly up about 60%, which is almost double the 31% return for the S&P 500. And when investors consider the material things that make stocks go up, GoDaddy stock is rising for the right reasons.

For starters, GoDaddy continues growing even though it's been around a long time. In 2022, the company's revenue was up 7% year over year, and it was up 4% in 2023. Then in the first quarter of 2024, revenue grew by another 7% compared to the prior-year period.

Some investors might scoff at a single-digit growth rate for GoDaddy. And in isolation, it's true that the company's revenue growth didn't move the needle much. But its free cash flow has fared much better because of where the growth is coming from -- more on that in a moment. Consider that free-cash-flow growth exceeded revenue growth in 2022, 2023, and in Q1, which is a solid trend at this point.

Moreover, thanks to using its cash flow to buy back stock, GoDaddy has reduced its share count, which boosts its free cash flow per share. This is important for individual shareholders because their ownership stakes are thereby getting more valuable.

In summary, GoDaddy reduced its share count, grew its revenue, and grew its free cash flow. And its free cash flow per share went up faster than its stock price, which means its recent market-beating performance is justified.

CrowdStrike Stock Is Getting Added to the S&P 500. But This Other New S&P 500 Addition Could Be a Better Bargain Buy. | The Motley Fool (2)

GDDY data by YCharts

The real question for investors today is whether GoDaddy can continue growing revenue and free cash flow while reducing its share count. And I believe the answer is "yes."

GoDaddy makes most of its money with domain name services -- this is its top-of-mind service, and 92% of its customers in 2023 bought a domain name from the company. However, GoDaddy increasingly offers services for starting, growing, and marketing a business, including with products for building websites, accepting payments, and more.

These complementary products are no-brainers for GoDaddy and have boosted profit margins -- this explains why free cash flow is growing faster than revenue. And the company's recent artificial intelligence (AI) tools are further boosting the adoption of its newer products, according to management.

As a result, GoDaddy expects free-cash-flow growth to keep outpacing revenue growth. Management expects to generate $4.5 billion cumulative free cash flow through the end of 2026. Moreover, management is still authorized to repurchase $1.1 billion in shares as of the end of Q1, to further reduce the share count.

Trading at just 20 times its free cash flow, GoDaddy stock is a far better bargain than CrowdStrike stock, as the chart below shows.

CrowdStrike Stock Is Getting Added to the S&P 500. But This Other New S&P 500 Addition Could Be a Better Bargain Buy. | The Motley Fool (3)

CRWD Price to Free Cash Flow data by YCharts

It's not as exciting or as high-growth as CrowdStrike. But GoDaddy is growing its free cash flow at a respectable rate, and the valuation is quite reasonable. This combination of profitable growth and fairly priced shares could yield strong stock returns from here, which is why I believe investors should give GoDaddy stock a hard look now.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.

CrowdStrike Stock Is Getting Added to the S&P 500. But This Other New S&P 500 Addition Could Be a Better Bargain Buy. | The Motley Fool (2024)

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