Not Palantir. Not Snowflake. This AI Software Stock Could Be the Next Multibagger.

Artificial intelligence (AI) has already created some spectacular winners on Wall Street. Palantir Technologies has surged roughly 1,100% over the last three years, while Snowflake has delivered a 119% return during the same period.

CrowdStrike (NASDAQ: CRWD) has had a good run as well, jumping more than 450% over the last three years and becoming one of Wall Street's biggest cybersecurity success stories. The growing demand for artificial intelligence (AI) security could keep its business expanding for years.

But there's a catch. Investors have already placed a whopping $264 billion valuation on the company, leaving little room for disappointment.

That creates an interesting question for investors looking for the next multibagger -- a stock that doubles, triples, or delivers even bigger returns.

Can CrowdStrike grow fast enough to justify its current valuation and still deliver those kinds of gains? The answer depends on two things: how quickly its business expands and how much investors are willing to pay for that growth.

Image source: Getty Images.

CrowdStrike's growth makes the case

CrowdStrike has established itself as a major player in cybersecurity through its Falcon platform, which helps businesses protect their computers, cloud applications, and sensitive information. As I recently highlighted, the growing adoption of AI is creating additional security challenges that could provide another source of long-term demand.

And CrowdStrike's existing business is already growing at an outstanding pace.

In its fiscal second quarter, which ended July 31, the company reported revenue of $1.47 billion, up 26% year over year. Annual recurring revenue (ARR) increased 25% to $5.84 billion, while net new ARR jumped 51% to a record $333 million.

Those numbers are encouraging. But they're especially interesting when you look at what CrowdStrike might become over the next five years. If the company maintains its current 25% annual ARR growth rate, its recurring revenue would reach approximately $17.8 billion in five years.

That's more than triple its current level.

Of course, maintaining 25% growth becomes increasingly difficult as a company gets bigger. CrowdStrike would need to add billions in new recurring revenue annually to sustain that pace. But the cybersecurity market continues to expand, and CrowdStrike has opportunities to sell additional security services to its existing customers.

What would it take for CrowdStrike to triple?

At its Oct. 23 closing price of $257.57, CrowdStrike had a market capitalization of approximately $264 billion. That's roughly 45 times its current ARR. It's an expensive valuation, and it shows that investors already expect considerable growth.

But what happens if CrowdStrike triples its ARR over the next five years? At $17.8 billion in ARR, maintaining today's valuation multiple would give CrowdStrike a market capitalization of approximately $801 billion. That's slightly more than three times its current valuation -- and enough to make CrowdStrike a three-bagger.

However, there's another possibility. As CrowdStrike matures, investors may become less willing to pay such a high premium for its growth. If its valuation falls to 20 times ARR, that same $17.8 billion in recurring revenue would support a market capitalization of just $356 billion.

That's only about 35% above today's valuation, despite the company's business tripling in size.

What CrowdStrike needs to deliver

CrowdStrike has several things working in its favor. Management recently raised its fiscal 2027 net new ARR growth guidance to 34% at the midpoint. That's a positive sign of demand, though it shouldn't be conflated with a forecast of 34% growth in total ARR.

Profitability is another important piece of the puzzle. CrowdStrike generated $377 million in free cash flow during its fiscal second quarter. Its GAAP subscription gross margin also improved to 78%, up from 77% a year earlier. That matters because expanding AI security capabilities could bring additional computing and development costs. Maintaining healthy margins as the business grows would help CrowdStrike convert more of its revenue into profits.

The company reported just $5.3 million in GAAP net income attributable to CrowdStrike during the quarter, although that represented an improvement from the previous year's loss.

Investors will want to see those accounting profits become more substantial.

The numbers worth watching

CrowdStrike has a credible opportunity to become a much larger business over the next five years. But with a market capitalization already approaching $264 billion, becoming a multibagger is a considerably tougher assignment.

If recurring revenue continues expanding above 20%, margins hold up, and profits begin catching up with free cash flow, CrowdStrike could justify a substantial increase in its valuation.

CrowdStrike's business has plenty of room to grow. The challenge for investors is figuring out how much of that growth Wall Street has already priced into the stock.

Patrick Sanders has positions in Palantir Technologies. The Motley Fool has positions in and recommends CrowdStrike, Palantir Technologies, and Snowflake. The Motley Fool has a disclosure policy.