There has been a slew of recent and impactful cyberattacks. Earlier this week, ports in Australia had to be shut down for a time after a supposed sabotage. China's ICBC, the world's biggest bank, was also hit by an apparent cyber-terrorist. Also recall in September how MGM Grand dealt with its own attack. Clearly there's no letup in such malicious and deliberate activities. Among the world's leading companies working to prevent such events is CrowdStrike (CRWD, Financial).
I am neutral on shares, though. The fundamentals appear healthy and the technicals are sound, but there is a considerable valuation premium on this fast-growing company.
Company description
According to Bank of America Global Research, CrowdStrike is an industry leader in the Endpoint Protection Platform market (EPP). A multinational corporation, its solutions and technologies help protect large firms' internet-connected devices and cloud storage platforms from complex cyberattacks. As the cybersecurity marketplace continues to transition from signature-based on-premises services to cloud-based platforms, CRWD is seen as a pre-eminent company leading that progress with its AI and machine-learning capabilities. Its threat-management workload security and vulnerability management tools are made available through subscriptions and direct sales to drive revenue.
Key data
The Texas-based $58 billion market cap Systems Software industry company within the Information Technology sector does not have positive GAAP earnings over the last 12 months and it has not paid dividends in the last year. Ahead of earnings later this month, shares trade with a high 51% implied volatility percentage, and short interest on the stock is modest at 2.4%. Analysts expect $0.74 of EPS to be reported in the November 28 Q3 report, a sharp 85% jump from year-ago levels. Importantly for shareholders, the company has topped analysts' earnings estimates in each of the previous 12 quarters while the stock has traded up post-earnings just twice in the last six instances.
Earnings Review
Back in August, CrowdStrike reported a very strong quarter. Q2 operating EPS verified at $0.75, topping the Wall Street analyst consensus forecast by $0.18. Revenue growth was also impressive - $732 million of Q2 net sales marked a 37% increase from year-ago levels, modestly beating estimates. The management team issued Q3 revenue guidance in the range of $775.4 million to $778 million β the consensus at the time was just $774 million. The firm reported impressive performance across segments, including its LogScale, cloud security, and identity protection solutions areas, all helping to drive robust annual recurring revenue growth. Gross margins also ticked up on a YoY basis.As for the earnings outlook, the firm expects $0.74 of per-share profits to be reported later this month.
Shares actually dipped immediately after the Q2 numbers crossed the wires, but buyers quickly stepped back in to bring shares to multi-month highs near $170. What I liked about the quarter was not only the upbeat expectations but also that CRWD recorded a record $245 million in operating cash flow and $189 of free cash flow - something the current market demands of top-performing stocks.
Risks
Perhaps the biggest challenge for CRWD right now is its lofty valuation, but as far as fundamental conditions go, weaker adoption of its new services should a corporate spending slowdown take place is a key potential downside. Additionally, cyber security breaches among its clients is a concern as well as heightened competition from next-gen startups.
Valuation and Dividends
On valuation, analysts at BofA see earnings rising at a very strong pace over the next two years. The current consensus estimate calls for FY 2025 EPS near $3.52 with FY 2026 per-share earnings of $4.48 - that is a high ~25% growth rate while sales are seen rising by about the same percentage. No dividends are expected to be paid on this fast-growing large cap, and the company sells for an EV/EBITDA ratio that is about 3x that of the S&P 500. The good news, mentioned previously, is that CrowdStrike is free cash flow positive with further FCF gains likely in the quarters ahead.
If we assume a forward non-GAAP PEG ratio of 2, slightly above the Information Technology sector median, and an EPS growth rate near 25% with FY 25 of $3.52, then we are talking about a stock price that should be near $176, putting shares slightly overvalued in my view.
CrowdStrike: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts
Source: BofA Global Research
Competitor Analysis
CRWD's primary competitors include Fortinet (FTNT), VMWare (VMW), Zscaler (ZS), CheckPoint (CHKP), and Palo Alto Networks (PANW). Most of these companies likewise trade at rich valuations, though VMW and CHKP have forward earnings multiples close to 20. On a growth basis, CRWD stands out with an EBITDA growth rate above 50% for the out year β only ZS comes close to that trajectory. CRWD is simply middle of the road, however, when it comes to gross margins β a key indicator for cybersecurity names.
Corporate Event Risk Calendar
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q3 2024 earnings date of Tuesday, November 28 AMC with a conference call immediately after the numbers hit the tape. You can listen live here. No other volatility catalysts are seen on the calendar.
Source: Wall Street Horizon
The Technical Take
With shares perhaps stretched on valuation, but with a solid growth and free cash flow outlook, the chart is doing all the right things. Notice in the graph below that CRWD has been in a consistent uptrend since notching a multi-year low of $92 in early 2023. With shares about doubling so far on the year, I see the stock encroaching on a possible resistance area between $200 and $210. I also identified a triangle pattern off the January nadir up to a horizontal line drawn in orange near $170. Based on that formation, an upside measured move price objective comes to about $245 β that would be right near the April 2022 peak, so that is a possible upside target should CRWD's healthy momentum continue.
What's more, take a look at the RSI momentum indicator at the top of the chart β it's in the bullish 40 to 80 range, and it has been since the second quarter of this year. With an uptrend line holding firm and a long-term 200-day moving average that is positively sloped, the trend is clearly higher with the bulls in control. Finally, a downtrend resistance line off the all-time high was broken earlier this year.
Overall, the technicals appear solid and a long play with a stop under $165 appears favorable heading into and through the Q3 2024 quarterly report on the 28th.
CRWD: Robust Momentum, Shares Near Technical Resistance
Source: Stockcharts.com
The Bottom Line
I am neutral on CrowdStrike. The technical case is bullish, but the valuation is quite rich today. The fundamentals, meanwhile, appear to be in great shape. I expect an EPS beat to be reported later this month, and buying on dips is likely the prudent play in my view.
