Shares of cybersecurity software developer CrowdStrike (CRWD) are attempting to form a bottom after losing more than half of their value on a peak-to-trough basis. With Russia’s invasion of Ukraine, the risk of cyberattacks is arguably at a high point. Still, investors have been shying away from the high-multiple growth stocks, some of which may have overextended their runs in the back half of 2021.
Though CrowdStrike is on the right side of powerful secular tailwinds, the stock remains richly valued at just north of 22 times sales. While CrowdStrike has a leading endpoint security product that will experience next-level growth, it’s still quite tough to gauge how much of a premium the name ought to command.
CrowdStrike’s multiple will be increasingly difficult to justify with rates slated to rise rapidly. However, I do think CrowdStrike is a standout player that may be worth the rich premium. The cybersecurity market could fuel many years of high double-digit growth. And this growth is unlikely to slow considerably, even if we’re bound to fall into a recession at some point over the next 18 months.
I’ve praised CrowdStrike as a unique growth company with defensive characteristics in prior pieces. Though still expensive, it’s tough to be anything but bullish on shares of CRWD after such a beatdown.
CrowdStrike Pouncing on Opportunities Within the Cyber Space
With a strong balance sheet (nearly $2 billion worth of cash as of the last quarter), I’d look for CrowdStrike to continue taking advantage of opportunities, as broader tech valuations are to cool off further going into year-end.
CrowdStrike has been quite active on the M&A front over the past few years. In 2021, the firm paid a whopping $400 million to acquire log management software company, Humio.
Such acquisitions improve CrowdStrike’s endpoint security arsenal and could lengthen the width of its moat. Undoubtedly, few firms can detect and respond to threats better than CrowdStrike. Every bolt-on acquisition helps the firm stay a step ahead of potential cyberthreats and rivals within the broader cybersecurity space.
Though higher interest rates could slow the pace of acquisitions, one has to think the firm is more than willing to pay up for any innovations that can help it better protect, and provide value to, its users. Humio’s cutting-edge log management platform is bound to boost CrowdStrike’s ability to identify threats and timely respond in a timelier manner.
Indeed, time is of the essence when it comes to countering cyberattacks. Though Humio’s price tag may have been a tad frothy at the time of acquisition, I do think that the acquisition will prove its worth in due time.
More Growth on the Horizon
CrowdStrike’s growth profile will be little-rattled by whatever is troubling the broader markets. Good times or bad, cyberthreats need to be pro-actively addressed by firms, not just within the enterprise but across SMB (small and medium-sized business) realm.
The company recently shed light on its intriguing growth path, with a plan to target $3 billion and $5 billion worth of ARR (annualized recurring revenue) for fiscal years 2024 and 2026, respectively.
These are incredibly ambitious targets, but given the winds are still at the firm’s back, such targets, I believe, are more than realistic. Particularly as CrowdStrike looks to take share in an already sizable total addressable market.
Finally, the company is targeting 20-22% for adjusted operating margins by fiscal 2025.
If CrowdStrike can meet its longer-term ARR and margin targets, the stock may be worth paying more than 20 times sales for. With one of the best managers in the business, CrowdStrike could easily surpass its estimates, even if with an economic downturn thrown in.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CRWD stock comes in as a Moderate Buy. Out of 20 analyst ratings, there are 19 Buy recommendations and one Hold recommendation.
The average CrowdStrike price target is $273.50, implying an upside of 85.71%. Analyst price targets range from a low of $212 per share to a high of $340 per share.
The Bottom Line on CrowdStrike Stock
CrowdStrike remains one of the most expensive tech stocks in this market. The company’s promising growth profile and enviable fundamentals warrant such a premium price tag, even in a market hostile toward high-multiple growth stocks.
For now, CrowdStrike is in the penalty box because it’s not yet profitable and may not be for quite some time. That said, the firm generates considerable amounts of cash and has all the hallmarks of a future cash cow.
As the firm takes steps toward meeting its long-term ARR and operating margin goals, Mr. Market may have a difficult time keeping the stock depressed at these lows, even with the valuation working against it.
Discover new investment ideas with data you can trust.
Read full Disclaimer & Disclosure
