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Why CrowdStrike Stock Dropped Today

By Rich Smith - Updated Feb 17, 2021 at 1:41PM

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Good news can't overcome a bad valuation.

What happened

Another day, another bit of good news from Wall Street for CrowdStrike Holdings (CRWD -6.33%) investors -- so why aren't they happy?

Bright and early Tuesday morning, analysts at Canaccord Genuity initiated coverage of the cybersecurity stock with a buy rating and a $280 price target, helping to give the shares a tiny lift after a long holiday weekend. Wednesday, however, a more muted price target hike to $270 from investment bank Mizuho is having the opposite effect -- and CrowdStrike stock is down 2.5% as of 1 p.m. EST.

Simple red arrow declining stock chart on a white checked background

Image source: Getty Images.

So what

Does that make sense? I mean, yesterday, Canaccord called CrowdStrike stock "a long-term secular winner" (reports TheFly.com), one with a "first-mover cloud advantage" that's helping it to capture a greater and greater share of cybersecurity budgets. CrowdStrike was selling for $242 a share at the time, but despite the analyst's assertion that there was "ample room for share price expansion longer term," investors hardly bid up the stock at all yesterday.

And now, today, Mizuho chimes in with, yes, an admittedly slightly lower price target, but also with comments on healthy demand for the company's products. And CrowdStrike goes down on the news?

What's up with that?

Now what

Here's what I think is happening, and why investors aren't responding with greater enthusiasm to analysts' favorable words about CrowdStrike: On the one hand, yes, business is booming. We saw that last quarter, when CrowdStrike's sales surged 86% year over year.

On the other hand, though, CrowdStrike still looks unprofitable to a lot of people. After all, the company hasn't reported a profit according to generally accepted accounting principles (GAAP) since it came public, and is on its way to reporting its fifth straight year of losses.

Granted, P/E ratios aren't the be-all and end-all of valuation. CrowdStrike generated a robust $254 million in real free cash flow over the past year, up from just $20 million reported in 2019. But even so, the stock looks richly priced at more than 205 times trailing FCF. And if you ask me, that's the real reason CrowdStrike isn't getting a bigger lift from all the positive commentary on Wall Street.

Investors agree: CrowdStrike is a great business, but it just costs too darn much.

This article represents the opinion of the writer(s), 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.

 

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Stocks Mentioned

CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
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