How High Can Crowdstrike Stock Go?

Wall Street pays a premium for fast growth companies and Crowdstrike (NASDAQ:CRWD) fits squarely into that category with revenues climbing by 39.9% over the past year. That’s likely one of the reasons why Blue Zone Wealth Advisors with $288.5 million in assets under management took a stake in the firm. 

The last few years have shown, however, that a fast-growing top line alone is not enough to keep the market satisfied. Look no further than the swings of fortune that Cathie Wood’s ARK Invest has encountered to see how growth absent profitability can lead to huge price volatility.

The recent trend in the Crowdstrike, though, suggests it’s struck virtual gold by rising 171.3% over the past year and 89.6% in the past 6 months alone. Now the question is will it continue and by how much?

Having run up so far over the past year, a real question crops up about how much gas is left in the tank and whether the price has run past fair value?

The reasons for the spike in share price have been clear. Revenues have been on an absolute tear. Take for instance the past four quarters of year-over-year growth which have come in at 47.9%, 42.0%, 36.7% and 35.3% respectively.

Remarkably, these are among the least impressive annual growth rates in the top line over the past 5 years. Without exception, management has reported similar or higher numbers in each and every quarter over that time frame.

The pace at which the firm has been growing has offset the ongoing earnings figures reported each quarter in the red. Specifically, earnings before interest and taxes have been negative in 19 of the past 20 quarters, with the most recent quarter the only standout exception, reporting a modest $3.2 million figure.

With each passing quarter, the balance sheet starts to look ever more impressive too. Cash now sits at $2.9 billion while long-term is modest by comparison at $742 million.

Yet the company’s $68 billion market capitalization seems lofty when compared to the revenues of $2.8 billion. Those numbers translate to a 23.9x price-to-sales ratio, a sky high multiple if ever there was one. And a price-to-earnings ratio doesn’t make sense given the lack of profitability over the past twelve months.

So what does the future hold for Crowdstrike? Is it a house of cards ready to tumble from its lofty levels or will the fast growth continue and make the current multiples look cheap in retrospect?

How High Can Crowdstrike Stock Go?

According to 45 analysts, Crowdstrike is unlikely to go higher based on a valuation analysis that puts fair value 4.4% lower at $268.97 per share.

A discounted cash flow forecast analysis is even more pessimistic. Over a 5 year time frame, CRWD share price is expected to dip down to $254 per share. 

So if a cash flows analysis and analysts are all on the same page in assessing that the share price has run too far too fast and eclipsed the company’s intrinsic net worth, what could propel the share price still higher?

On a technical basis, the momentum is currently favoring the bulls so it would be dangerous to step in front of that freight train at this time. Over the medium term, it’s likely that Crowdstrike will experience a significant pullback in share price when market sentiment dims.

For now, it seems investors are clinging to the claims of management that the company’s total addressable market will reach $225 billion over the next 5 years.

Those kinds of lofty visions are only tolerated for so long, however, and eventually the company needs to post tangible figures on its financial statements to justify its high valuation, and thankfully for shareholders it’s doing so. 

Away from the income statement and balance sheet, Crowdstrike is quietly and steadily growing cash flows. Consider this for exceptional growth. In Q1 2019, levered FCF was just $1.6 million. Exactly two years later, it was reported at $101.9 million and most recently it came in at $252.3 million.

With each passing quarter, free cash flows appear to rise steadily and that predictability is being rewarded by shareholders.

Is Crowdstrike a Buy?

The bullish trend and momentum makes Crowdstrike a Buy for technical traders, who can ride the moving averages higher but for value investors, the price is too rich at this time to justify an investment.

The odds favor the share price continuing higher based on the strong trend at this time, but technical traders who are following the share can more swiftly turn bearish on a dime if necessary.

Value investors, by contrast, who buy at this time are at serious risk of a large drawdown if sentiment shifts quickly in the broader market, which is very possible near-term.

As bullish seasonal flows taper off in January, expect macroeconomic concerns to resurface heading into the middle part of Q1. Stocks that will be most susceptible to larger drawdowns include Crowdstrike as a result of its very high price-to-sales multiple and non-existent earnings over the past year.

The old adage that the market can remain irrational longer than you can remain solvent is very real and momentum can sustain higher prices beyond fair value in the near-term. But with the share price up so much over the past year, this isn’t a stock for the faint of heart.

Rather it’s the type of position that only a skilled technical trader will likely navigate successfully as the downside risk grows with each passing day and the upside narrows, meaning the reward to risk ratio is skewing in favor of the bears as the bull run grows long in the tooth.

In short, this is a high-flying stock with tremendous fundamentals that has run too far too fast and has the potential to produce a large drawdown when sentiment shifts in favor of the bears.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.