Shares of CRWD Are on Sale - Consider the Risk.

One of the biggest losers as of today's afternoon session is data processing services company CrowdStrike, whose shares are down -7.2%, underperforming the Nasdaq by -6.0%.
At $126.94, CRWD is 26.51% below its average analyst target price of $172.74.

The average analyst rating for the stock is buy. CRWD lagged -7.0% behind the S&P 500 index today, and by -27.0% over the last year, returning -35.2%.

CrowdStrike Holdings, Inc. provides cloud-delivered protection across endpoints and cloud workloads, identity, and data. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.

CrowdStrike does not release its trailing 12 month P/E ratio since its earnings per share of $-0.79 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for CRWD of -160.7. Based on the company's positive earnings guidance of $3.01, the stock has a forward P/E ratio of 42.2. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

CrowdStrike's PEG ratio of 1.04 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

To better understand the strength of CrowdStrike's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported TotalRevenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-01-31 2,241,236 1,830,117 -8.48 13.65
2022-01-31 1,451,594 1,210,921 -9.82 7.18
2021-01-31 874,438 737,422 -10.58 65.13
2020-01-31 481,413 485,851 -30.34 n/a
  • Average operating margins: -14.8%
  • Coefficient of variability (lower numbers indicate less volatility): 70.2%

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From CrowdStrike's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) FreeCashFlow ($ k) YoY Growth (%)
2023-01-31 941,007 -266,437 674,570 52.93
2022-01-31 574,784 -133,689 441,095 50.69
2021-01-31 356,566 -63,843 292,723 2250.06
2020-01-31 99,943 -87,487 12,456 n/a
  • Average free cash flow: $355,211,000.00
  • Coefficient of variability (the lower the better): 78.1%

Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, CRWD is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. CrowdStrike's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 20, so it's likely that equity investors are over-valuing the company's assets.

As of first quarter of 2023, CrowdStrike is likely fairly valued because it has a negative P/E ratio, an elevated P/B ratio, and a pattern of improving cash flows. The stock has poor growth indicators because of its negative and irregular operating margins, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into CRWD's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.