After Earnings, Is CrowdStrike Stock a Buy, a Sell, or Fairly Valued?

CrowdStrike CRWD released its second-quarter earnings report on Aug. 28, 2024. Here’s Morningstar’s take on CrowdStrike’s earnings and stock.

Key Morningstar Metrics for CrowdStrike Holdings

• Fair Value Estimate: $300.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of CrowdStrike Holdings’ Q2 Earnings

• The results were better than expected. The firm reduced its outlook for 2025, but the reduction was smaller than investors’ expectations.
• Despite the July outage, it appears CrowdStrike’s retention has remained stable, indicating customer trust in the firm is quite high and most are choosing to stick by the firm.
• Recent events affirm our view that security professionals make nuanced purchasing decisions and give considerable weight to how a vendor responds to an outage and what remedial actions they take. We believe CrowdStrike’s remedial steps were quite well-received by security practitioners, likely helping with customer retention.
• The firm announced a customer commitment program that includes discounts, bundling, and other incentives for customers to keep spending on CrowdStrike’s products. While this would be a near-term headwind to top-line growth, we believe the long-term value catalyzed by maintaining customer accounts far exceeds the near-term costs.

Fair Value Estimate for CrowdStrike Holdings

With its 3-star rating, we believe CrowdStrike’s stock is fairly valued compared with our long-term fair value estimate of $300 per share, which implies a fiscal 2025 enterprise value/sales multiple of 17 times. We forecast CrowdStrike’s revenue to see a 29% compound annual growth rate over the next five years. We expect the firm to continually expand its client base while maintaining strong upselling performance with existing clients.

In our view, endpoint security is a key area of enterprise security spend, and we expect it to remain important for clients in the coming years. CrowdStrike’s “land-and-expand” model has shown great success, with the firm consistently expanding sales from existing customers by selling them additional modules or protecting more endpoints per customer. We expect this upselling velocity to persist as the ever-changing threat landscape provides strong momentum.

Read more about CrowdStrike Holdings’ fair value estimate.

Economic Moat Rating

We believe CrowdStrike has a narrow moat owing to strong customer switching costs associated with Falcon, its endpoint security platform. We view endpoint security as vital to any modern enterprise’s IT security infrastructure; according to our estimates, it’s set to be around a fifth of the overall cybersecurity spending by 2025. CrowdStrike has emerged as a clear market leader here.

Additionally, we believe the value of CrowdStrike’s platform can be gleaned from the firm’s impressive net retention metrics and strong customer growth. With increased adoption of endpoint security platforms as enterprises switch away from legacy antiviruses, as well as a sticky platform ensuring the firm can land and expand its customers, we believe CrowdStrike is more than likely to generate excess returns over the next 10 years.

Read more about CrowdStrike Holdings’ economic moat.

Financial Strength

We view CrowdStrike’s financial position as healthy. The firm ended fiscal 2024 with around $3.5 billion in cash and liquid investments. While CrowdStrike carries around $740 million in debt on its balance sheet, we believe the firm’s cash reserves and ability to generate healthy cash flow from its business will be sufficient to cover its commitments over our explicit forecast.

While 2024 marked CrowdStrike’s first year of GAAP profitability, the firm’s free cash flow to equity margin has been positive for the last five fiscal years. In the future, we expect it to maintain its positive FCFE profile throughout our explicit forecast while expanding its operating margin profile materially. We expect CrowdStrike’s cash generation to improve as it increases its operating leverage by toning down some of its research and sales expenditures.

Read more about CrowdStrike Holdings’ financial strength.

Risk and Uncertainty

We assign CrowdStrike a High Uncertainty Rating. While the firm has positioned itself well to benefit from secular tailwinds, such as a shift to zero-trust security and digital transformations, the cybersecurity space is known for its rapid pace of development. Large incumbents that have performed well in particular verticals stand to be disrupted by upstarts that could offer better performance in key modules.

To stay ahead of the pack, CrowdStrike has invested a great deal of capital in building out its Falcon platform (which consists of more than 20 modules). However, risks come from a changing demand landscape and newer products that impact CrowdStrike’s competitive positioning.

Read more about CrowdStrike Holdings’ risk and uncertainty.

CRWD Bulls Say

• CrowdStrike has strong secular tailwinds since the endpoint, cloud, identity, and security operations markets are projected to rapidly grow.
• CrowdStrike has market leadership in endpoint security and has high enterprise penetration within the space.
• The company stands to benefit as clients consolidate vendors and opt for a platform-based cybersecurity approach.

CRWD Bears Say

• Large public cloud vendors often offer their own cybersecurity solutions, which could hamper CrowdStrike’s growth opportunities.
• CrowdStrike faces competition from vendors like Palo Alto, which have increasingly invested in endpoint security.
• There remains a risk that CrowdStrike may miss out on the next big technology, allowing its competitors to catch up.

This article was compiled by Renee Kaplan.