DCF Conclusion Study on Crowdstrike (CRWD)
What does the Model say about CRWD's potential?
Note: I will place CRWD in my QQQ stocks library.
Last week, cybersecurity leader Crowdstrike made a large impression within the media due to the widespread internet outage. These events have caused the stock to see its value cut by 1/3.
I think it’s a good opportunity for me to use my DCF Conclusion Study framework to see if there’s value in this stock on intermediate-term timeframes.
My DCF Conclusion Study was able to identify 200-210 as a bounce region on Applied Materials (AMAT). This turned out to be a swing low for AMAT, before a 6% bounce today. Similar story with ASML at 910-920. Any time a company even tries to get close to my Bear Case (a situation that I stress test with extremely pessimistic assumptions), I expect a powerful bounce to ensue.
Although CRWD isn’t a top 10 weighted QQQ ETF stock which is usually my focus, it is considered to be one of the largest competitors to Microsoft in cybersecurity. Given that Microsoft is definitely on my focus list, I’ll estimate CRWD’s value with my DCF Conclusion Study.
Let’s get into it.
CRWD DCF Discussion/Context
Crowdstrike is a leader in endpoint cybersecurity services as a cloud-delivered solution. The company has grown rapidly over the past several years as demand for its core platform product Falcon has posted very strong gross and net retention metrics. Crowdstrike has executed well with a potent upselling strategy that has allowed it to integrate itself deeper and deeper into an enterprise’ IT system over time which increases switching costs to other security providers.
The current fear after the internet outage which occurred on 7/19/2024 is that clients would do a mass migration towards other security providers to avoid future disruptions to their operations.
A loss of business contracts would weaken the case for the company’s high valuation.
This fear is not unfounded, but if enterprise clients do not move en masse to competitors Palo Alto Networks or SentinelOne, then next quarter’s earnings report which discusses forward guidance may alleviate investor fears and cause the stock to bounce.
In the meantime, my opinion is that the best proxy for whether any stock rebound in CRWD is durable or not depends on any concrete news that clients stick with CRWD’s security systems.
Because the issue that caused CRWD’s stock slide is fundamental in nature, the cure or rebound catalyst will also be fundamentally-driven.
Focus on whether they are able to retain clients. If they are, further selloffs will represent an opportunity to enter.
Exhibit 1: DCF Core Figures from 2024
Here are the conclusions that I’m drawing:
The growth rates at the revenue level are very impressive and this growth profile is one of the highest within tech, which explains the high valuation multiples as will be described below.
EBITDA margins is expected to expand rapidly and taper off in the high 20% profile in the coming years. That is a very attractive EBITDA margin profile in relation to the top line growth rate.
Crowdstrike’s moat is reasonably strong and it has integrated its systems deeply enough with client IT enterprises to make switching costs burdensome. However, the latest internet outage caused by their software update may be enough of a catalyst for some clients to rethink their cybersecurity solution provider. This is what Analysts fear as it reduces the reliability of forecasting into the future for Crowdstrike.
Margin Commentary (Margins are incredibly important to the DCF Model):
Before the internet outage incident, Crowdstrike has been executing very well as its EBITDA margin curve has trended higher over the past several years - an impressive accomplishment as it went from -50% to +10% in the span of 5 years.
This margin trajectory is the reason the stock has soared over the past several years, and if there is continued sustained margin expansion, the equity value of the company could see a further lift.
Valuation
Given that Crowdstrike has only recently (in the past 5 years) been able to achieve profitability, its EV/EBITDA valuation historical chart is not necessarily a good visual to understand how to benchmark the firm.
In this case, I will look at the highest-growth names in the market such as NVDA or TSLA where they command roughly 40-50X EV/EBITDA in valuation and will use these as reference points.
Sell Side analysts prefer to use EV/Revenue to judge Crowdstrike given that its EBITDA history is short. However, almost all of my stock price targets come from using EV/EBITDA and I am more comfortable this metric more than EV/Revenue.
For the time being, it does not make too much sense to use the company’s own historical EV/EBITDA valuation to understand what is fair value.
DCF Model Outcomes/Scenario Analysis:
The most important inputs in my opinion are 1.) Top Line Growth (Sales) 2.) EBITDA Margins (profitability) and 3.) Valuation Multiple EV/EBITDA (what Investors Pay).
In all scenarios below, I will assume Wall Street Revenue estimates are accurate. The inputs that I change are EBITDA Margins and the EV/EBITDA Multiple.
For Crowdstrike in particular, I will use EV/EBITDA reference points from the highest-growth names in the market that are growing at similar growth rates.
Scenario 1 Assumptions: