What happened

Shares of cybersecurity specialist CrowdStrike Holdings (NASDAQ:CRWD) had surged 6% by noon EST on Wednesday after analysts at investment bank R.W. Baird upgraded the stock to outperform and assigned it a $155 target price.

So what

According to TheFly.com, which reported the upgrade this morning, Baird likes CrowdStrike for its strong fundamentals as well as "its favorable competitive positioning, and management's ability to execute."

You'd expect an analyst to say something similar about pretty much any stock that it likes, so what makes CrowdStrike special?

As my fellow Motley Fool contributor Daniel Sparks recently pointed out, CrowdStrike's last quarterly earnings report featured 84% year-over-year revenue growth, and 89% growth in subscription revenue -- arguably the most important part of the revenue stream, because it is recurring and dependable quarter after quarter, and year after year.

Stock up glowing green arrow climbs on a stock screen

Image source: Getty Images.

Now what

Granted, this growth is slowing. Analysts forecast that Q3 sales will grow "only" 70% year over year, and long-term, most analysts agree investors should expect about 25% annualized earnings growth from CrowdStrike.

Still, even a 25% growth rate is pretty impressive. What worries me about CrowdStrike is more the valuation that investors are being asked to pay for that growth. With no GAAP earnings to speak of, I value CrowdStrike stock instead on its robust free cash flow (FCF) of $185 million over the past 12 months. The problem is, when divided into CrowdStrike's $28.7 billion market capitalization, this means that CrowdStrike stock is selling for a massive 155 times trailing FCF.

Even a 25% growth rate isn't fast enough to support that kind of valuation for long -- which is why I'll ignore Baird's advice and will not invest in CrowdStrike Holdings.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.